Week 17 Sitrep

The recovery in U.S. stocks continued last week, however not all stocks participated equally. Many of the major stock indexes showed nice gains last week, especially the NASDAQ up more than 6%. The S&P 500 Index was up more than 3% and the Dow Jones Industrial Average up over 2%. However, the gains were limited to a handful of stocks while the rest languished making it hard to own a traditional diversified portfolio. The small company Russell 2000 Index fell 1.4% for the week. International stocks did not participate equally as the broad MSCI EAFE (Europe, Australasia & Far East) Index was up less than 1%.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 4/20/20

 

U.S. stocks returned to their recent trends last week with large growth companies significantly outperforming all others. The gains last week were delivered to a narrow number of stocks, including the largest companies that have fared the best throughout the economic shutdown. Good news of new treatment possibilities for COVID-19 fueled health care stocks while consumer discretionary and technology stocks also did well. Both health care and technology are close to showing positive returns for 2020 after last weeks gains. Sectors most affected by the economic shutdown include real estate and financials, while energy and industrials have also struggled this year.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 4/20/20

 

The 2020 correction is notable for being the fastest 30% correction from all-time highs.1 While all market corrections typically see a bounce off the lows initially, the normal correction also follows a pattern of moving back down or sideways for a few weeks or months. We use great caution trying to compare today’s market against former markets given the extremely unique features of the virus and corresponding response from worldwide governments. There is a tremendous amount of uncertainty over the next few months regarding how quickly the economy, and U.S. companies, can rebound.

Source: Bespoke Investment Group, The Bespoke Report, 4/17/20

 

Increased uncertainty doesn’t bode with the recent market climb we have seen. The S&P 500 Index has officially retraced 50% of the decline from February 19th.2 Bespoke notes that there has been tremendous resistance at the 50% level and it would not be uncommon to trade in this range for a short period. Market headlines have centered on potential drug remedies for the COVID-19 virus and evidence of fewer new cases. Many healthcare analysts have noted the actual number of cases as well as the death rate are significantly lower than forecasts. Jeffrey Gundlach, bond manager at Doubleline Capital, was quoted on Saturday stating the recent increase in market value for major stock indexes since March 23rd is roughly equal to the dollar amount of stimulus promised by the Fed and federal government.3

Source: Bespoke Investment Group, The Bespoke Report, 4/17/20

 

 

We have seen the start of first quarter earnings season and the results have been slightly worse than expected. Banks and financial companies reported earnings last week that were mostly below expectations. A concerning item from bank earnings is the amount of “loan loss provisions” that have been set aside – clearly, the banks are expecting significant loan defaults in the coming months. According to Bespoke, overall earnings from the S&P 500 companies are forecast to be 22% lower than what was expected back in February.4 Analysts have reduced earnings estimates by the most ever. Interestingly, U.S. companies have refrained from making comments on earnings guidance over the next quarter.

Source: Factset Insight, John Butters, 4/17/20

 

We have been warning in our webinars that economic analysts are expecting dramatic reductions in second quarter GDP. The great unknown is what will they expect for the third and fourth quarter of 2020. Those estimates will largely depend on how quickly, and effectively, the U.S. economy is able to rebound from the decline in March activity. Be very cautious about predictions and expectations being published about growth estimates beyond this quarter – no one knows exactly what to expect until we see the actual opening of businesses again. FactSet Insight reports that analyst expectations for U.S. GDP growth are now -2.5% for 2020 but expect a rebound to more normal ranges in 2021.5

Source: Factset Insight, Tracking the Global Impact of COVID-19, 4/14/20

 

We have also discussed the heightened risk of investing in European stocks over the last few years, especially in a post-Brexit Europe. Analysts have recognized the same risk and the extremely weak economic outlook reinforces our views. We clearly see correlation between those areas hit hardest by the COVID-19 virus for both 2019 actual growth and 2020 estimates. We remain underinvested in Europe for both stocks and bonds.

Source: Factset Insight, Sara Potter, CFA, 4/13/20

 

The First Trust economics blog continues to update their economic snapshot to reflect how recent events have affected economic activity. The travel-related data is expected and may take longer to recover. The shutdown has obviously reduced federal tax receipts over the last month while promised stimulus spending continues to come from the Federal government. It may seem intuitive, but Brian Wesbury notes that without the private sector (private businesses) there is no money to pay for government. In order to promise the stimulus, the government is effectively “borrowing” from future growth in the U.S. economy.6

Source: First Trust Advisors, Brian Wesbury, 4/20/20

Our market indicators remain mixed with the long-term and short-term indicators in positive mode while the intermediate indicator remains negative. There has been tremendous change in the short-term indicator as the markets have swayed back and forth. Just 15 days ago the short-term indicator reflected zero sectors in demand mode while Monday showed 28 out of 36 sectors back in demand mode. We remain encouraged that the long-term indicator has not moved significantly since the mid-March drop and reflects the desire for investors to continue to own U.S. stocks on a long-term basis.

U.S. interest rates have resumed their decline over the last week. The 10-year U.S. Treasury bond saw its yield go down by 0.08% last week. Recall that longer-term interest rates are closely correlated to future economic growth expectations. Lower interest rates help stimulate business activity while making it difficult on investors to find attractive yields. In the last month we have noticed that CD’s, money market funds and other safe short-term investments are experiencing declining interest rates.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 4/20/20

 

One last interesting statistic from our friends at Bespoke Investment Group, the traditional southern states have experienced dramatically lower cases and deaths from the recent COVID-19 virus. Southern states have reported higher test rates than their northern counterparts and yet has seen slower growth in new cases. We will be interested to see the economic effects from various parts of the country when things return to normal. For now, we would assume southern states will experience earlier reopening of businesses and faster economic growth.7

Source: Bespoke Investment Group, The Bespoke Report, 4/17/20

 

Our webinar series has begun, and we will be hosting three webinars in the coming weeks.

  • Tuesday, April 28th – Retirement & Tax Planning Strategies
  • Thursday, April 30th – Market & Investment Portfolio Updates
  • Wednesday, May 6th – Portfolio Investment Update for existing clients only

If you have not received an invitation for these but would like to join us, please reply to this email and we will be sure to send an invitation. We have been encouraged by the responses from the first few webinars and believe these will be a regular activity for us going forward.

If you’d like to schedule a time to discuss your portfolio or the markets in detail, please feel free to call our office at (281) 616-5935 or send an e-mail to cameron.malott@engravewealth.com. We welcome the opportunity to sit down with you and learn more about your situation so we can help you optimize your portfolio to meet your financial goals for years to come.

Engrave Wealth Partners Investment Committee

Bill Day, CFP®, CIMA

Taylor Parker, CFP®

Greg Parker


Footnotes:
1. Bespoke Investment Group, The Bespoke Report, 4/17/20
2. Bespoke Investment Group, The Bespoke Report, 4/17/20
3. Twitter.com, Jeffrey Gundlach, April 18, 2020
4. Bespoke Investment Group, The Bespoke Report, 4/17/20
5. Factset Insight, John Butters, 4/17/20
6. First Trust Economics Blog, Brian Wesbury, 4/20/20
7. Bespoke Investment Group, The Bespoke Report, 4/17/20

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