Overview: Stock markets around the world sold off last week as COVID-19 cases continued to rise and fiscal stimulus failed to materialize. In the U.S., the S&P 500 Index ended lower by – 5.6%. International stocks sold off as well, with developed (EAFE) stocks down -5.5%, and emerging markets (EM) trading -2.9% lower. In Europe, Germany, France, and the UK all re-imposed nationwide restrictions as virus cases surged. U.S. Treasury yields rose to 0.86% from 0.68% at the beginning of October, as investors remain on edge over the pandemic. In addition, election uncertainty, likely to continue this week, has contributed to market volatility as we enter a busy week for political and economic news. In key economic data, initial U.S. third-quarter gross domestic product (GDP) came in at 33.1%, beating expectations and reversing the -31.4% loss reported for the second quarter. The economy saw a rebound in consumption, up 41%, along with improved numbers for inventories and exports. Investors will now be watching current economic data to determine if the improvement is sustainable.
The week ahead: In a full week of political and economic news, markets will be focused on the election results, followed by the November Fed meeting which will take place Wednesday and Thursday of this week. Economic data will be highlighted by the employment report on Friday, with the consensus of 600,000 jobs and the unemployment rate falling from 7.9% to 7.7%.
Performance and diversification: This year has seen disparate performance between growth and value stocks, and especially among the meg-cap names. Year-to-date, the S&P 500 is up 2.8% in total return, but this performance hides a big difference between the top names and the remaining stocks. U.S. markets have been led by a handful of growth companies that have benefitted from the current working-from-home environment. In fact, the five largest names of the S&P 500 by market capitalization have returned about 38% so far, while the remaining stocks are down -5%. Furthermore, the market capitalization of these 5 stocks is now 23% of the entire S&P 500 index, up from 18% in 2000. At the present time, the valuation of the overall index on a price/earnings (P/E) basis is well above its average since 1996. However, the P/E ratio of the index excluding these largest stocks is only slightly more expensive than its history. This highlights the importance of maintaining diversification to identify opportunities over the longer investment cycle.
Weekly Returns and Data
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Indices are unmanaged, represent past performance, do not incur fees or expenses, and cannot be invested into directly. Past performance is no guarantee of future results.