By Gunjan Banerji
U.S. stocks are racing toward a second consecutive quarter of
dramatic gains, continuing a historic stock-market recovery that
few predicted in the depths of the March downturn.
The S&P 500 and Nasdaq Composite hit a string of records in
July and August, a journey that has confounded many investors with
its sheer velocity and strength. Despite a stretch of volatility
that dampened momentum in September, the S&P 500 and Dow Jones
Industrial Average gained 7.6% and 6.4%, respectively, for the
quarter through Tuesday.
The advances build on even bigger gains in the previous period,
capping the best two-quarter performance since 2009. Both indexes
are up more than 25% since the end of March. The Nasdaq Composite
is on track to surge 10% for the third quarter and is up 44% over
the past six months, its biggest two-quarter gain since 2000.
All three indexes rose more than 1% in afternoon trading
Wednesday.
Many investors attribute the strong performance to an economy
that has steadily improved -- though it remains far from where it
was to start the year -- as well as a powerful surge in big
technology stocks that has steered the market higher and higher.
Consumer spending has ticked up from abysmal levels earlier in the
year and hiring in the U.S. has picked up for four consecutive
months.
Meanwhile, the Federal Reserve approved a shift in how it sets
interest rates in the third quarter, signaling it would leave them
low for years.
"The big surprise was the adaptability," said Stephen Lee, a
founding principal at Logan Capital Management. "The economy showed
how adaptable it is."
Still, there are plenty of potential challenges ahead for
investors.
Many are closely tracking the presidential election in November,
wary that the result may not be known immediately. This has spurred
bets on volatility through the end of the year in markets from
derivatives to currencies and bonds.
"In the short-term, both interest rates and risk sentiment have
the potential to shift postelection, leading to sharp changes in
equity prices," Goldman Sachs analysts wrote Tuesday in a note to
clients. The firm expects the S&P 500 to hit 3600 by the end of
the year, about an 8% jump from Tuesday's close.
Despite the market's gains since March, stocks are essentially
back to where they started the year. The S&P 500 is up 3.2% for
2020 through Tuesday, while the Dow industrials are down 3.8%. Only
the tech-heavy Nasdaq Composite has clinched a meaningful gain for
the year, up 24%.
Among the big winners in the third quarter have been shares of
home builders, which have benefited from an epic housing boom as
the pandemic has created a historic shortage of homes for sale.
Americans have been rushing to land more living space, anticipating
they will continue working from home during the pandemic.
Shares of D.R. Horton and PulteGroup have both jumped about 33%
this quarter through Tuesday. Lennar's stock has rallied 28%. New
Home has advanced 52%.
But shares of tech darlings and growth stocks stole the show
again, and there have been exceptional moves by the U.S. stock
market's behemoths. Apple's valuation crossed the $2 trillion mark,
making the iPhone-maker bigger than entire global markets. The
company's shares have soared 25% over the past three months.
And Tesla surged to a fresh high in August, gaining a market
value of more than $400 billion. The shares have surged more than
90% in the third quarter.
Both stocks have been favorites among institutional and
individual investors, many of whom are new to trading stocks or
have ramped up activity significantly this year. Some investors
grew so optimistic about stocks like these that they turned to the
derivatives markets to make aggressive bets on the market, fueling
even greater gains at times.
Roadblocks emerged in the tail end of the quarter, pulling major
indexes lower and crimping an epic run for the technology sector.
The Nasdaq Composite fell into a correction territory -- defined as
at least a 10% drop from the recent high -- just three sessions
after hitting a record, the speediest-ever such fall. Although the
index has since recovered some of the losses, the abrupt fall
highlighted how fragile markets appear, and the uncertainty
ahead.
"At the first sign of trouble, everyone bailed," said Ilya
Feygin, managing director at brokerage WallachBeth Capital.
Stock funds recently saw the biggest weekly outflows since 2018,
according to Deutsche Bank. Meanwhile, traditionally safer
investments like Treasurys and gold have done well, with gold
prices jumping to an all-time high in July, and bond prices inching
higher while yields fell.
The yield on the 10-year U.S. Treasury note was on track to tick
down for the third consecutive quarter, settling at 0.644%
Tuesday.
Concerns remain that coronavirus infections could tick up in the
colder months. For example, the daily share of people tested in New
York City who are positive for Covid-19 recently hit 3.25% for the
first time since June.
The stock rally this quarter ignited greater debate about
whether value stocks, those like cyclical companies with relatively
low price-to-earnings ratios, would manage to soar past their
faster-growing peers.
There has been a recent shift in market leadership between
stocks that benefit from Americans' staying at home during the
pandemic and those that would get a lift from a prolonged economic
recovery, highlighting that much remains unknown about the path of
the virus and economy.
"All of this jockeying is because people are uncertain," said
Mr. Feygin. "We have a huge amount of uncertainty as to what the
path of the virus will be."
But stocks have staged an aggressive rebound in the last few
days of the quarter, and some investors say that though there will
likely be volatility ahead, the worst may have passed.
"You'll get a wobble if people start to worry that the economy's
starting to shut down again," said Eddie Perkin, chief equity
investment officer at Eaton Vance. Still, he said "I don't think
you'll get a repeat of that deep of a pullback" as in March.
Write to Gunjan Banerji at Gunjan.Banerji@wsj.com
(END) Dow Jones Newswires
September 30, 2020 13:07 ET (17:07 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.