In 2004, Green Day released their Grammy-winning album American Idiot. The tone of the album is noticeably dark and speaks to some of the negative feelings in America towards the country and its government post 9/11 and the Iraq war. Even though 15 years have passed, many of the same themes are still relevant today, as we have all observed over the past few months our neighbours to the south slowly slipping towards what feels to many like the fall of the empire.
One of the more popular songs on the album was Wake Me Up When September Ends. The song feels even more appropriate in 2020. After watching everything melt higher in August, negative headlines caught up to markets in September. Large-cap technology stocks which had looked invincible suffered the most in the month. The technology-heavy Nasdaq fell 5.67%, giving back almost all the gains made in August.
The reasons for the sell-off in September are numerous. It may have been just a give back of the low-volume move from the month prior. However, it feels more like investors returned from their summer vacations and faced fears of a second wave of the virus, the lack of a US fiscal deal and a slowdown in the pace of economic growth.
The stock market performance since the dramatic sell-off of the first quarter has been nothing short of historic. Not even the most optimistic could have thought that within six months we would see many indices recover all of their losses (many of which were more than 30%) and be back to marking all-time highs. But with this rapid recovery, we’ve also seen a return to excesses of greed and speculation.
The rise of SPACs, where investors give sponsors a blank cheque to do acquisitions, is a bull market activity and not something you see in markets where investors are being rational. At last count, there are over 200 of these SPACs wandering the US looking for acquisition targets to ‘de-SPAC.’
For every successful SPAC (Virgin Galactic, Draft Kings, etc.), there will be many that fail to get any deals done. As many have made a comparison of the move in the FANG stocks to previous bubbles, watching the performance of these SPACs could be a great signal for the peak of this move.
While markets were lower through the month, there were still many positives. For the most part, the sell-off was orderly. There never seemed to be any panic; in fact, many had been expecting it and positioned for a move lower. It may work out to be one of the rare healthy corrections that provide investors a buying opportunity.
September will also go down in history as the busiest month for IPOs on the NYSE, which again is remarkable given the environment. Liquidity has to go somewhere and at the moment the favourite place to deploy capital has been in American equities. The question we all will have to answer is for how long this will last?
Watching the performance of the US dollar may give us some clues. Plenty has been written on the decline of the greenback as a safe-haven asset, but it bounced back, up 3% in the month. A strong US dollar can be seen as a negative to many investment sectors (cyclicals, multi-nationals, gold) and a best-case scenario could be a narrow trading range going forward.
As we head closer to what should be an extremely ugly election, we can only hope we will see a clearly stated winner on election night. The worst-case scenario that is beginning to worry market observers is a contested election.
Comments coming from both sides are questioning mail-in ballots, possibly setting up for a repeat of the famous hanging-chad recount of the 2000 election. That vote had to be settled in the US Supreme Court and took over five weeks for an answer. Who wants to bet this time will be any different or any quicker? As we all know, markets hate uncertainty and the prospect of this dragging on longer could be even more damaging.
In a year that has thrown many twists, one constant has been volatility. That doesn’t seem to be ending anytime soon. Active management has made a comeback this year and we are finally seeing how strategies that are trading focused and can take advantage of dislocations in the market should perform. Another of the hits on the Green Day album, was the song Holiday, which is something we may all need once this year is finally over.
— Greg Taylor, CFA is the Chief Investment Officer of Purpose Investments
All data sourced from Bloomberg unless otherwise noted.
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