U.S. stocks set for sharp quarterly gain, but recent caution not over


FILE PHOTO: A street sign is seen in front of the New York Stock Exchange on Wall Street in New York, February 10, 2009. REUTERS/Eric Thayer/

September 30, 2020

By Caroline Valetkevitch

NEW YORK (Reuters) – U.S. stocks are set to close out another quarter with sharp gains on Wednesday, but investors could remain wary with the upcoming U.S. presidential election and mounting coronavirus cases.

The S&P 500 <.SPX> was on track for a September decline, its first monthly fall since March, when the coronavirus began its rapid spread across the United States.

The benchmark index was last up nearly 9% for the third quarter, following a nearly 20% rise in the second quarter. That would make its two-quarter gain its biggest such rise since 2009.

The Nasdaq composite index <.IXIC> was set to gain more than 11% for the third quarter, and register its biggest two-quarter rise since 2000.

The Nasdaq’s big comeback The Nasdaq’s big comeback: https://graphics.reuters.com/USA-STOCKS/QUARTEREND/bdwvkkyjnvm/chart.png

Hopes of a strong recovery and historic stimulus from Washington and the Federal Reserve fueled the U.S. stock market rally following the coronavirus-driven crash in March, but stocks have struggled since the market peaked on Sept. 2. Recent weeks have been marked by a sell-off in heavyweight technology-related shares.

“People are going into the end of the quarter with a bit of a wary, uncertain feeling,” said Michael James, managing director of equity trading at Wedbush Securities in Los Angeles.

“We not only have a still-unstable COVID pandemic situation, you have the uncertainty of the election.”

MATERIALS LEAD IN SEPTEMBER

“The September pullback in U.S. equities occurred from overbought conditions, following a five-month surge, in the historically worst-performing month of the year,” Terry Sandven, chief equity strategist at U.S. Bank Wealth Management, wrote in a note.

But he said many risks for stocks remain, including the pandemic, Nov. 3 presidential election and a Supreme Court vacancy following Ruth Bader Ginsberg’s death.

Investors have worried that the election results will be uncertain or possibly not accepted.

The S&P 500 materials sector <.SPLRCM> outperformed and led gains among S&P sectors for September, while the most heavily weighted sector, technology <.SPLRCT>, was set to be among the weakest.

Performance among sectors was mixed for the quarter. Materials and industrials <.SPLRCI> were set to be among the top performers along with consumer discretionary <.SPLRCD> and technology for the third quarter, while energy <.SPNY> lagged.

S&P 500 sectors in Q3: https://fingfx.thomsonreuters.com/gfx/mkt/xlbvgjylwpq/Pasted%20image%201601479647809.png

S&P 500 component performance in Q3: https://fingfx.thomsonreuters.com/gfx/mkt/dgkplbkjypb/Pasted%20image%201601489353000.png

GROWTH WINS OVER VALUE FOR QUARTER

Valuations make cyclical sectors “compelling,” Sandven noted.

Investors have struggled to figure out where to invest, with many mega-cap tech stocks trading well above their long-term price-to-earnings ratios.

Value stocks continued a trend of underperforming growth names for the quarter. The Russell 1000 growth index <.RLG> is up about 14%, while the Russell 1000 value index <.RLV> is up about 6%.

Growth vs Value performance: https://fingfx.thomsonreuters.com/gfx/mkt/oakveeyoovr/Pasted%20image%201601479583561.png

Stocks continued to look more attractive compared with bonds.

After tightening for most of the quarter, the spread between the S&P 500 dividend yield and the 10-year U.S. Treasuries yield <US10YT=RR> began to widen in the last month.

S&P dividend yield vs 10-yr U.S. Treasury: https://fingfx.thomsonreuters.com/gfx/mkt/ygdvzkamqpw/Pasted%20image%201601478849314.png

(Reporting by Caroline Valetkevitch, Noel Randewich, Chuck Mikolajczak and April Joyner; editing by Richard Chang)

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