Week 36 Sitrep

August was a challenging month for the S&P 500 Index as the index closed down 1.58% (assuming reinvested dividends) for the month. However, there was a great divergence in the various stocks within the S&P 500 for the month that is not reflected in the average return. For example, smaller companies within the S&P 500 had a very difficult month showing a decline of more than 10% for the month.1

     

Source: J.P. Morgan Asset Management, Weekly Market Recap, September 2, 2019

 

The driver of stock prices higher for the last week was, once again, news headlines related to the tariffs and trade agreements. Fortunately, this week’s headlines were positive as both China and the U.S. offered encouraging comments about renewed talks in September. The trend in stock returns for 2019 continued to play out last week as large companies with a growth bias had nice returns.2 Technology, real estate and consumer cyclical sectors remain the best performing sectors for the year.

Source: J.P. Morgan Asset Management, Weekly Market Recap, September 2, 2019

 

August was a difficult month if you’re trying to understand what the market will do for the rest of the year. We saw increased uncertainty throughout the month as headlines put more focus on tweets than economic or earnings data. To be fair, August is not a month where we typically see many updates on the economy or earnings; many of the Wall Street analysts are known to take their vacation during the month and trading volumes are generally lighter. However, the higher volatility during the month still raises concerns over the direction of stock prices.

Source: Bespoke Investment Group, The Bespoke Report, August 30, 2019

 

Our investment committee relies heavily on a process that helps us identify supply and demand trends in the market. We like to invest in asset classes (i.e. large companies versus small companies; growth companies versus value companies) where trends are showing stronger demand. However, we also like to avoid asset classes where trends are showing weaker demand. We believe that our investment process can help by limiting participation in investments that have higher potential of going down. A good example in 2019 is the smaller companies mentioned earlier. The Russell 2000 Index, generally accepted as a benchmark for smaller company stocks, is now down 4.39% over the last 12 months.3 We have avoided owning any investments in that category in 2019.

Source: Bespoke Investment Group, The Bespoke Report, August 30, 2019

 

We have significant positions in our portfolio that benefitted from the divergence in August as well. According to Bespoke Investment Group, the average stock in the S&P 500 was down 3.7% in August. However, the largest 50 stocks were only down 1.62%. The 50 smallest companies in the index were down 10.78%!4

 

Similarly, stocks in the index with the lowest valuations (lowest P/E ratio) fell approximately 11.5% during August while stocks with the highest valuations fell only 0.78%. Stocks with the highest dividend yields fell more than 7% for the month while lower dividend-yielding stocks were down just over 4%.5 The bottom line is that there is a trend in place for 2019 that has kept stock prices range bound yet still shows investors seeking companies that are larger with higher expected growth rates. Yet, we also know that the stock market continues in a flat pattern since the beginning of 2018. The chart we have shown multiple times, including last week, displays this pattern:

Source: Bespoke Investment Group, The Bespoke Report, August 23, 2019

 

We continue to preach caution in the short-term as we now enter a time when the market has historically been challenging. The month of September has produced many negative returns over the years. However, the months of October through December have been historically favorable for investors.6 There is no guarantee that the upcoming months will repeat their traditional patterns, but we will monitor closely, nonetheless.

Source: Bespoke Investment Group, The Bespoke Report, August 30, 2019

 

Our investment committee continues to believe the U.S. stock market remains in a secular bull market. Our view of the U.S. economy supports continued future growth, albeit at a slower pace than 2018, and U.S. companies continue to produce positive earnings growth. Interest rates and inflation expectations are also supportive of further growth in the economy. And we see the S&P 500 within 5% of an all-time high closing price.

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. 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, 8/30/19

2. J.P. Morgan Asset Management, Weekly Market Update, 9/2/19

3. J.P. Morgan Asset Management, Weekly Market Update, 9/2/19

4. Bespoke Investment Group, The Bespoke Report, 8/30/19

5. Bespoke Investment Group, The Bespoke Report, 8/30/19

6. Bespoke Investment Group, The Bespoke Report, 8/30/19

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