The S&P 500 fell another 2.5% this week as heavy selling in tech shares continued. The market has once again slipped below its pre-COVID-19 high, but there are signs that battle lines are forming at these levels. Despite several failed attempts at a rally in tech, we expect the market was cushioned by relative improvement from materials and industrials. The shift under the surface continues to be reflective of improvement in the economy as new COVID-19 cases fall. Still, the S&P 500 will need tech to find its footing to put an end to the sell-off.
We believe there are a number of fundamental reasons to remain bullish at these levels. The Fed has committed to reaccelerating inflation. This means that rates should remain low for some time and continue to make stocks an attractive alternative relative to bonds. GDP is also tracking at over a 30% growth rate for the third quarter.1 This is off of an extremely low second quarter reading, but it appears the economy is certainly trending in a better direction. Lastly, there is a significant amount of stimulus that has yet to be used up by consumers and businesses, and we are likely looking at a far more generous government going forward. There is also a significant amount of cash on the sidelines to jump on equities now trading at more favorable valuations than a few weeks ago.
On the other hand, tech gains are going to be harder to come by after their impressive run. Congress is struggling to pass a second round of stimulus, and we aren't out of the woods with COVID-19. This is the battle that is currently being fought. Right now, investors are trying to decide what sectors are worthy of being pushed higher. We are seeing falling correlations among sectors as a result. It appears a stock picker's market is emerging.
Preston May, CBE®
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S&P 500: Standard & Poor’s (S&P) 500 Index. The S&P 500 Index is an unmanaged, capitalization-weighted index designed to measure the performance of the broad U.S. economy through changes in the aggregate market value of 500 stocks representing all major industries.