Equity markets rebound. US stocks opened solidly higher this morning to rebound from Tuesday’s sell-off. The outsized summer advance after the best August in over 30 years, still-elevated COVID-19 infections, US-China tensions, and skepticism concerning the economic rebound are among reasons cited for the pullback. European stocks were higher midday, while the major Asian markets finished lower overnight.
Fastest correction ever. It took the Nasdaq only three days to go from an all-time high to a correction (down 10%). The previous fastest correction was six days, set in late February of this year. The Nasdaq and many large tech stocks were historically overbought, so some type of correction was expected; however, the speed of this sell-off is still surprising. Going back to 1980 and reviewing the 11 other corrections that took place in less than a month, the future returns were actually quite strong—higher 10 of 11 times six months after the correction and up 23% on average.
Best defense was a good offense. Despite the 10-year Treasury yield declining overall last cycle, there were six periods in which it climbed at least 75 basis points (0.75%). None of the major investment-grade bond sectors typically saw gains over those periods, but high-yield corporates and bank loans did. The catch, of course, is the extra equity-like risk and loss of diversification benefits. For more on what happened during rising rate periods last cycle, see today’s LPL Research blog.
Technical update. Weakness from last week extended into the holiday-shortened week on Tuesday. The S&P 500 fell 2.8%, but the Nasdaq led benchmark indexes lower, falling 4.1%. The move pushed more than 60% of the components in the S&P 500 information technology sector below their respective 50-day moving averages. That’s closer but likely still short of the sort of oversold condition that may present a buying opportunity in the year’s best-performing sector.
COVID-19 news. On Tuesday new cases in the United States fell 46.8% over the prior week to about 22,500, bringing the drop in the seven-day average to 12.1% week over week (source: COVID Tracking Project). Hospitalizations dropped more than 40% week over week for the second straight day. AstraZeneca/Oxford put their coronavirus vaccine trial on hold due to an adverse reaction in a participant described as “routine.” Pfizer and BioNTech will supply the European Union with 200 million vaccine doses.
LPL Research in the Media
LPL Chief Market Strategist Ryan Detrick joined Bloomberg Radio (38:00 mark) recently to discuss the recent weakness and volatility.
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