The S&P 500 put in its first back-to-back weeks of losses since April as the FAANGs (Facebook, Amazon, Apple, Netflix, and Alphabet/Google) and technology sector continued to give back some of their impressive gains for 2020. Headlines have been fairly quiet, but the recent stock market weakness coincides with deteriorating odds of a fifth coronavirus relief bill, indications that perhaps the economic recovery is losing steam, a setback around the AstraZeneca/Oxford vaccine, and continued political uncertainty heading into November. However, it is important to put this recent pullback in context as the S&P 500 is still above where it was a month ago despite falling over -4.5% in September. Furthermore, much of the weakness has been concentrated to the mega-cap stocks, with Apple, Microsoft, Amazon, Alphabet, Facebook, and Tesla giving back more than $1T in market value in just 3 days of trading last week. Despite these recent losses, each of these stocks continue to be major winners in 2020 and remain above where they traded just a month prior.
Underlying the weakness in tech stocks that entered September up 35.99% for the year versus 9.74% for the S&P 500, has been signs of investors rotating into value stocks that have significantly underperformed on the year. As a result, market breadth, or the ratio of advancing stocks to declining stocks, has been constructive and for the second week in a row the Russell 1000 Value index has outperformed the Russell 1000 Growth index after entering September lagging behind growth by almost 4000 basis points (-9.35% vs. 30.47% per FactSet), the largest such divergence in decades. We have long highlighted the underperformance of value as unsustainable and we have been encouraged to see value leading growth in September (-2.49% vs -6.90%). Last week we posited that a pullback was “healthy”, and we continue to believe this, but should stock market weakness become broader and more indiscriminate, that would certainly give us pause. In addition, the S&P 500 tested and bounced off of its 50-day moving average today to close slightly positive for the day, which gives us some confidence that this pullback has been technically driven. Next week will be a busier week for economic data releases with retail sales for August, a variety of manufacturing data, and September’s consumer sentiment and we will be closely monitoring ~3320 for the S&P 500 (50-day moving average), as well as how value and small-cap stocks continue to trade relative to growth and the mega-caps.
Ian Browning, CFA | Director, Investment Strategies & Shareholder
Peter E. Simmons, JD | President & CEO