Week 22 Sitrep

It seemed the U.S. stock market would break out of the multi-week sideways routine last Monday, but the momentum slowed as the week progressed. The S&P 500 opened higher Monday morning on news that the Federal Reserve would stop at nothing to promote recovery in the economy and renewed hopes for a COVID vaccine. The gains on Monday would stick but the rest of the week resulted in little movement. Most major indexes were up 3% or more for the week with the small company index, the Russell 2000, posting nearly 8% returns.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 5/25/20


Only two sectors struggled to keep up with the S&P 500 last week, consumer staples and health care. Health care fell on headlines that were indecisive about potential vaccine results and many pharmaceutical companies saw negative returns for the week. The 2020 laggards enjoyed some respite last week as we saw surges for industrials, energy, and real estate stocks. The longer-term trend is still challenging for the year as technology, consumer discretionary and communication services stocks are seeing gains for the year. Large growth companies continue to dominate other asset classes while medium sized growth companies are experiencing a comeback.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 5/25/20


We had early hopes that the S&P 500 Index would break away from its sideways slump for the past month. The index has been in a trading range of 2,800 to 2,950 until it broke above 2,950 briefly last week. Unfortunately, the S&P 500 would finish the week right back at the 2,950 level with trading volumes exceptionally light heading into the holiday weekend. Although the index has broken above that level the first trading day after Memorial Day, the index is still meeting strong resistance just above the 3,000 level. According to Andrew Adams at Saut Strategy, the S&P 500 is bumping up against its 200-day moving average and may find it difficult to move beyond the current level without strong economic or earnings news.1

Source: Saut Strategy, Andrew Adams, Trading Flash, 5/22/2020


The stock market is trying to decide which narrative will determine future direction. The narrative of economic decline, reduced earnings expectations, higher bankruptcies, and record unemployment is fighting against the narrative of “the government and Fed will do everything possible” to get the markets back to “before-shutdown” levels. The recent rally has helped those areas of the market that are down the most this year. Energy stocks have risen more than 60% since the March lows but are still down 30% this year. Bespoke Investment Group shared that 82% of stocks in the index are now trading above their 50-day moving average.2 But is that because the prices are up significantly or that the moving average is reflecting the worst of the downturn in March?

Source: Sentimentrader.com, Jason Goepfort, May 26, 2020


We are encouraged by the resiliency of the Nasdaq 100 Index since the March lows. There are many studies showing stocks in the Nasdaq Index are less affected by the economic shutdown. After all, the dominant industries in the Nasdaq include technology, health care, and communication services. The Nasdaq is the first index nearing a breakeven point for the calendar year. We continue to own a Nasdaq index position in client portfolio’s but will be monitoring it closely as economic conditions reveal an increase in bankruptcy filings and potential bond defaults.

Source: Bespoke Investment Group, The Bespoke Report, 5/22/20


With the conclusion of first quarter earnings season, analysts will begin to focus on what to expect from corporate earnings as the economy reopens. Traditionally, the market receives guidance from most companies regarding what to expect for future earnings results. According to John Butters of Factset, “a number of companies are currently having difficulty providing an estimate for future earnings due to the uncertainty surrounding the negative impacts of COVID-19.“3 Factset conducted surveys of companies after first quarter earnings to find that 64% of companies had withdrawn future earnings guidance. Of the few companies who issued some form of guidance, 44% of them were lowering their estimate of future earnings.4 In other words, there could be an opportunity for companies to offer positive earnings surprises when second quarter earnings are reported in July.

Source: Factset Insight, John Butters, 5/22/20


Recent economic reports come in two camps: April reports showing how bad things have gotten and May reports showing a modest rebound as some economies begin to reopen. First quarter GDP fell 4.8% from fourth quarter with expectations that second quarter GDP will also be negative.5 The unemployment rate was officially recorded at 14.7% in April but many analysts believe that actual unemployment is likely closer to 20%. Inflation fell by the fastest since 2008 last month as CPI came in at 0.8%.6 The common measure of leading indicators showed the worst month on record in April, however the most recent coincident indicators reveal that the economy may have bottomed and has begun a slow recovery. Bespoke reminds us that during normal recessions, the lag from a bottom to a new expansion is 3-4 months.7 The key question will be how the extreme shutdown of all economic activity fits into the definition of a “tradtional recession”.

Source: Bespoke Investment Group, The Bespoke Report, 5/22/20


The market reaction last Monday sent several stock market sectors into demand mode reversing our short-term indicator to positive. We currently have three of four market indicators in positive demand. This environment is indicative of higher risk in U.S. stock markets and encourage us to use caution when taking on risk in small companies and international stocks. Our long-term indicator remains firm and has not changed much over the last four weeks. Our asset class demand shows the best risk/reward options remain in large companies with growth characteristics.


The bond market continues to tell a different story than the stock market. While stock markets continue to rally, interest rates reveal that the economy will not resume its growth trajectory from earlier 2020 rates. When economic growth prospects rise, interest rates will normally rise with them. Reports from the last meeting of the Federal Reserve help us to see that the Fed is genuinely concerned about how fast the economy can recover from such a shock.8 Yields on U.S. Treasuries of multiple maturities reflect the same cautious expectations for economic growth.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 5/25/20


While we analyze a tremendous amount of data each week, there is usually one idea we like to share that is unusual. Bespoke referenced how hard New York state has been hit during the COVID-19 pandemic. The statistics are wide-ranging and long-term implications are difficult to predict, but it appears that many businesses have chosen to relocate their headquarters outside of New York over the last twenty years.


Bespoke measured the total market capitalization of all companies headquartered in New York state compared to California and Washington. To be sure, this is not related to the 2020 virus issues, but the value of companies in New York continues to shrink while the value of businesses headquartered in California continues to rise.9 No doubt that California has benefitted from the growth in technology related companies, especially in the Bay Area. I would have been interested to see Texas and Florida on this map as well.

Source: Bespoke Investment Group, The Bespoke Report, 5/22/20


If you would like to schedule time to discuss our process in greater detail, please call our office at (281)616-5935 or send an email to Cameron.malott@engravewealth.com. We are continually grateful for the confidence you have placed in our team. We look forward to serving your family in the years to come!


Engrave Wealth Partners Investment Committee

Bill Day, CFP®, CIMA

Taylor Parker, CFP®

Greg Parker

1. Saut Strategy, Andrew Adams, Trading Flash, May 22, 2020
2. Bespoke Investment Group, The Bespoke Report, 5/22/20
3. Factset Insight, John Butters, 5/22/20
4. Factset Insight, John Butters, 5/22/20
5. J.P. Morgan Asset Management, Economic Update, Dr. David Kelly, 5/25/20
6. J.P. Morgan Asset Management, Economic Update, Dr. David Kelly, 5/25/20
7. Bespoke Investment Group, The Bespoke Report, 5/22/20
8. Bespoke Investment Group, The Bespoke Report, 5/22/20
9. Bespoke Investment Group, The Bespoke Report, 5/22/20