Investors Finally Reassess the Speed of Economic Recovery09/08/2020

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Led by a sharp sell-off in the technology sector, over the past three trading days, we have seen U.S. equities dramatically fall. We do not foresee this drop as the beginning of a bear market. Instead, as we have noted in our three primary 2020 market themes, increasing volatility and a healthy correction are likely as investors re-evaluate their thesis of a V-shaped economic recovery and rotate away from expensive parts of the market.

Early this summer, we laid out our three primary economic and market predictions for the balance of 2020. They were a U-shaped economic recovery, elevated market volatility without retesting March lows, and a rotation into different sectors leading markets forward. All three of these themes are more conservative than the markets expected. Instead, investors had anticipated an aggressive V-shaped economic recovery, a relentless stock market that would likely sidestep any pullback, and the work-from-home environment would accelerate the growth in technology companies. Unfortunately, these three optimistic tones really stretched the hallmarks of investing: fundamentals, valuations, and momentum. Moderating economic data, as evidenced in our Social Distancing Dashboard, has challenged fundamentals. Despite slowing economic data and the corporate profit impact, the S&P 500 rallied approximately 50% from March 23 lows and stretched valuations. Even with these market headwinds, general fears of missing out in the market rally accelerated stock market momentum and kept bullish sentiment toward U.S. stocks very elevated.

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Commentaries are published by Cetera Investment Management LLC, an SEC registered adviser owned by Cetera Financial Group. Cetera Investment Management provides market perspectives, portfolio guidance, model management, and other investment advice to its affiliated broker-dealers, dually registered broker-dealers and registered investment advisers.

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