Weekly Investment Newsletter (SITREP) – June 22, 2020

U.S. stocks recorded gains this week that helped erase part of the previous week’s steep declines.  The technology-heavy NASDAQ Composite fared the best, almost hitting the all-time intraday high it established on June 10th.  The Dow Jones Industrial Average rose 266 points to finish the week at 25,871, a gain of 1.0%.  The NASDAQ Composite more than retraced last week’s decline, rising 3.7% to 9,946.  The large cap S&P 500 added 1.9%, while the midcap S&P 400 and small cap Russell 2000 rose 1.4% and 2.2%, respectively.1

Source: J.P. Morgan Asset Management, Weekly Market Recap, 6/22/20

 

Technology and health care stocks outperformed, while the real estate, energy, and utilities sectors lagged. We commonly reference the oversized disparities in gains between asset styles in 2020. For example, there is nearly a 24% difference in returns between large value companies and large growth companies this year. It has been particularly painful to be invested in the wrong style this year and broader index funds have been some of the worst investments. Investment portfolios following a broad asset allocation strategy that invests in every style and sector have underperformed significantly compared to a strategy that follows momentum trends.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 6/22/20

 

Stock prices have jettisoned off their lows in March painting a picture that all is well, and recovery is at hand. However, the low interest rates in bonds continue to affirm that the economy is slow to recover and that growth is likely further away. Even professional money managers have found themselves at odds over the recent stock gains. Marketwatch.com quoted Kevin Smith of Crescat Capital illustrating the disconnect that exists between fundamentals (like corporate earnings and profit margins) and stock prices. The current decline in profit margins is akin to prior economic crises that have seen stock prices drop 50% or more. 2

Source: Marketwatch.com; “La La Land?”; Shawna Langlois; 6/20/2020

 

Our webinars and client meetings often highlight that market performance occurs in trends followed by periods of consolidation. The easiest way to illustrate this is using the long-term moving average (200 day) over the last ten years. We note three major trends higher for the S&P 500 followed by short periods of sideways performance. The fourth trend was recently interrupted by the economic shutdown but has already started to rise modestly.3 It may take several months to know whether the bear market of March was a hiccup in a longer-term pattern or the beginning of a new consolidation period.

Source: Bespoke Investment Group, The Bespoke Report, 6/19/20

 

There have been several changes in trend for the markets since 2014 but none have been as prevalent as the difference between the energy and technology sectors. For the first five years of the bull market, the two sectors moved steadily higher together. However, as oil prices peaked in 2014 and started to decline, the energy sector began a downward pattern that has yet to be broken. The technology sector barely budged during the economic shutdown and has recently traded back at all-time highs. Technology now makes up more than 25% of the S&P 500 market valuation.4 Energy stocks have rebounded strongly off their lows in March, but still represent significantly less of the index than we saw five years ago.

Source: Bespoke Investment Group, The Bespoke Report, 6/19/20

 

Stock analysts follow corporate earnings growth and U.S. economic growth as the primary drivers for short-term market performance. Corporate earnings growth has weakened substantially since the economic shutdown occurred. Since most U.S. companies only report earnings once per quarter, analysts typically rely on mid-quarter guidance from corporate executives. We have noted that most companies have refused to share earnings guidance this quarter due to the uncertainty over reopened economies.

 

Until corporate earnings season begins the second week of July, analysts have shared their opinion regarding which companies could deliver optimal results in the form of stock ratings. Traditional ratings include buy, sell or hold recommendations. Factset Insight recently reported that 51.3% of all stocks in the S&P 500 have buy ratings while only 6.3% have sell ratings.5 The energy industry takes the prize as having the most stocks rated “buy” from analysts while the consumer staples sector has the fewest. The number of stocks receiving buy ratings has increased since the market started to decline, reflecting an opinion of better valuations by analysts. Historically, these buy/sell/hold ratings have been poor predictors of short-term stock performance.

Source: Factset Insight, John Butters, 6/19/20

 

Recent U.S. economic indicators continue to beat expectations from economists. We acknowledge that economic numbers are far from pre-shutdown levels, the spike in economic activity in May and June is encouraging. We have seen improvements in all areas of economic activity including weekly jobless claims (still large but less painful than a few weeks ago), retail sales (recently reported the best month-over-month gain ever) and mortgage applications (ninth weekly increase and the strongest reading since 2009).6

 

However, economic recovery seems to be elusive for other parts of the world. The global economic index remains in negative territory meaning that more economic forecasts outside the U.S. are coming in below expectations. The weakest economic growth remains in Eurozone countries. European economic growth is in the bottom 1% of all readings even after seeing a limited rebound.7

Source: Bespoke Investment Group, The Bespoke Report, 6/19/20

 

The short-term market indicator remains extremely volatile flipping back to a positive reading last Tuesday. Recall that the short-term market indicator is not used to measure overall risk in the markets or a portfolio, rather to help gauge short-term volatility in the markets and whether there is opportunity to add new cash to the investment portfolio. The long-term indicator has barely moved over the last month reflecting the obvious divergence in index returns. An investment in the NASDAQ index is now up more than 10% in 2020, the same investment in the Dow Jones Industrial Average is down nearly 10%. The Balance of Strength Indicator continues to reflect rising demand for stock investments over cash.

The bond market continues to urge caution on economic growth. Recall that rising interest rates are typically indicative of expected growth in the U.S. economy. However, the Federal Reserve has acted aggressively to keep all interest rates lower while the economy tries to recover from a nationwide shutdown. The lower interest rates, combined with a weaker U.S. dollar, have also helped international markets, especially emerging markets, to experience economic recovery. Fed chair Jerome Powell testified before Congress last week that full economic recovery for the U.S. could take until 2022.8

Source: J.P. Morgan Asset Management, Weekly Market Recap, 6/22/20

 

As the coronavirus spread across the nation, fear of its deadly effects hit unprecedented levels.  That fear naturally carried over to the stock market where nearly a third of all investors 65 years old and older sold their entire equity holdings.

 

According to data from Fidelity Investments, nearly 18% of all investors sold their entire equity holdings between February and May. However, for those aged 65 and older, that percentage was nearly double at over 30%.  With stocks back near their highs, LPL Financial senior market strategist Ryan Detrick noted, “this is yet another reason to have a plan in place before trouble comes, as making decisions when under duress frequently leads to the exact wrong decision.” We continue to emphasize caution when getting your “news” from the financial news media. Their scripts are written to gain advertisers, not help you with portfolio decisions.

 

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


Footnotes:

  1. J.P. Morgan Asset Management, Weekly Market Recap, 6/22/20
  2. marketwatch.com; “La La Land?”; Shawna Langlois; 6/20/2020
  3. Bespoke Investment Group, The Bespoke Report, 6/19/20
  4. Bespoke Investment Group, The Bespoke Report, 6/19/20
  5. Factset Insight, John Butters, 6/19/20
  6. Bespoke Investment Group, The Bespoke Report, 6/19/20
  7. Bespoke Investment Group, The Bespoke Report, 6/19/20
  8. Bespoke Investment Group, The Bespoke Report, 6/19/20
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