The stock market has had a bumpy ride over the last two weeks. The S&P 500 stock index closed on Monday, September 8, at 3,332 and proceeded to rise and fall back to 3,357 on Thursday, September 17. The index is still up about 50% since it bottomed near the end of March, and is up about 5% on the year.
The stock market has been especially volatile recently in the Information Technology sector. As mentioned in August 7 and August 21 articles, the stock market rally has been driven by technology stocks and largely by the tech giants Facebook, Apple, Amazon, Microsoft, and Google. During the uncertainty caused by COVID-19, investors fled to these companies that were seen to be safer with their strong balance sheets, and less affected by the economy slowing down.
Year-to-date through the end of August, there was the widest spread between the best (technology) and worst (energy) performing sectors at 76%, since 1932 according to . Technology stocks have appeared very expensive relative to their earnings. Over the past two weeks, investors have finally started rotating out of technology stocks and into other more defensive sectors, according to Schwab. The technology sector is now down over 10% since its peak in early September.
Mixed employment news continues and investors seem to be having difficulty interpreting the numbers. The number of people filing for first-time unemployment benefits continues to be consistently high, but the number of new jobs created also continues to be more than expected. The U.S. Department of Labor said that another 860,000 people filed for unemployment benefits for the week ending September 11. However, the department also reported that nearly 1.4 million jobs were added in August.
The unemployment rate has fallen to about 8.4% and the number of those on temporary layoffs continues to decline significantly from a peak of over 20 million in April, down to about 6 million in August, according to Bloomberg. However, the number of people who have permanently lost their jobs continues to increase to over 3.4 million. Therefore, it seems that the unemployment rate has fallen due to people having been furloughed now getting their jobs back. This will likely level out in the near-term. People who have permanently lost their jobs will likely need to find work, especially in the leisure and hospitality sector, before the unemployment rate will drop much further.
On the bright side, positive news has been reported on the economy. The “productivity” of employees, or economic output per hour worked, has risen to 50-year highs, according to Bloomberg. As more people are working from home and spending less time commuting and traveling, they have been working more hours efficiently. Productivity has been boosted by a 30% increase to investments in technology and equipment by corporations projected by Cornerstone Macro, and should be a key driver for corporate profits and GDP growth.
Estimates for third quarter GDP growth have been more optimistic, but there are a wide range of forecasts. The most optimistic forecast by the Federal Reserve Bank of Atlanta has the U.S. economy growing by 30% in the third quarter, while the Federal Reserve Bank of New York forecasts growth of only half of that. In either case, the economy would be well short of recovering to pre-pandemic levels before the end of the year and having a “V”-shaped recovery. It seems much more likely the economy will experience a “swoosh” shaped recovery and rebound to pre-pandemic levels by the end of next year, as explained in our previous article on recovery shapes.
The general election is only about six weeks away and the stock market will likely be focused on it in the coming weeks, with increasing volatility likely to follow. We will have much more commentary on the results of the election and its potential effect on the market in the short and long term, including a live webinar (more details to follow) that we will host on October 13.
