Weekly Investment Newsletter (SITREP) – August 24, 2020

What a strange week for the broader U.S. stock markets last week. If you read the headlines, you know that markets were generally favorable. However, most of the stocks traded on the market were down for the week. Andrew Adams of Saut Strategy commented that more stocks on the New York Stock Exchange were down for the week rather than up. His notes show that only a handful of stocks are causing the indexes to rise recently (read “lower market breadth”). On Friday alone, the Dow Jones Industrial Average rose by 180 points, but Apple stock accounted for 167 points of that gain.1


The major U.S. indexes ended the week mixed.  The week’s big story was the benchmark S&P 500 setting a new all-time high during the week.  The Dow Jones Industrial Average finished the week essentially flat at 27,930.  The technology-heavy NASDAQ Composite rose for a fourth consecutive week, adding 2.7%.  By market cap, the large cap S&P 500 added 0.7%, while the mid cap S&P 400 and small cap Russell 2000 ended the week down -2.0% and -1.6%, respectively.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 8/24/20


Growth stocks continued their winning ways last week as large growth stocks outpaced large value stocks by more than 4%. Large growth returns remain better than large value by more than 35% for 2020. Smaller companies also struggled last week as small value stocks were the biggest losers, down 3.6% on the week. The sector returns showed the renewal of technology, consumer discretionary and communication services leading the way as we have seen through much of 2020. Apple, alone, drove most of the return for technology last week.2

Source: J.P. Morgan Asset Management, Weekly Market Recap, 8/24/20


Our Global Dynamic Risk Management models continue to show favorable readings for all market indicators. The long-term, quarterly, and short-term indicators remain in positive territory while indicators for bonds and gold pulled back slightly over the last two weeks. The NASDAQ 100 Index remains the strongest individual investment style while health care has fallen in recent weeks. Market seasonality continues to urge caution despite the market indicators. Our notes show both the S&P 500 and NSADAQ indexes at the higher end of their valuation ranges meaning stocks remain a bit expensive on a short-term basis.

As we mentioned above, the S&P 500 Index set a new all-time high last week as the index broke through the February 2020 high of 3386. The two greatest rallies from the lows of March occurred in April and from late May to early June. Otherwise, the index has moved slowly higher. Analysts have become frustrated since July as there are very few sectors consistently leading the markets higher making it difficult to identify a trend. Many stocks in the index are trading lower over the last six weeks yet the index is moving higher.3 There are a small number of stocks which possess higher weightings in the index that are driving most of the returns.

Source: Bespoke Investment Group, The Bespoke Report, 8/21/20


We continue to read commentaries from analysts that “stocks are expensive”. While we recognize several ways to measure the valuations on stocks, there are a few flaws in using traditional measures such as P/E ratios. As mentioned in prior letters, economic recessions tend to overstate fluctuations in earnings which distort P/E ratios. However, we cannot deny that many of the S&P 500 industry groups are trading at elevated levels. Bespoke Investment Group recently noted that, although a handful of stocks are driving returns in the index, the rest of the market has not disappointed. Bespoke reports that 67% of industry groups are above their 200-day moving average while 87% are above their 50-day moving average.4

Source: Bespoke Investment Group, The Bespoke Report, 8/21/20


Wal-Mart wrapped up second quarter earnings season last week with a very strong report. Overall, 76% of companies reported earnings that were better than estimates, an impressive number given that analysts were continually adjusting estimates higher going into earnings season.5 To be certain, give the analysts some credit as they were making estimates based on very little guidance from U.S. companies going through the economic shutdowns. A successful earnings season has risen the guidance for the third quarter expectations. A higher earnings estimate for third quarter could make it more difficult for companies to beat earnings to the extent we saw in the second quarter.

Source: Bespoke Investment Group, The Bespoke Report, 8/21/20


We continue to see a strong divergence between the large companies and small companies in stock performance. The S&P 500 Index, which represents mostly large companies, has recently touched new all-time highs after 125 trading days without a record high. The Russell 2000 small company index has now gone 493 trading days (August 2018) without setting a new high.6 Small companies were strong participants in the recovery of April and May but have flatlined since then. The future of small company performance could definitely be impacted by changes in the corporate tax structure being proposed by the Biden campaign. Our research continues to urge caution with small company indexes.


Source: Bespoke Investment Group, The Bespoke Report, 8/21/20


It has been an interesting two weeks for interest rates. Last week, the U.S. Treasury attempted to auction $32 billion of 20-year Bonds and 30-year TIPS (inflation protected securities). The auctions were met with lackluster demand and the interest rate for long-dated bonds rose nearly 0.20% (20 basis points).7 Analysts question whether this is a function of disinterested investors or a mishap with the Federal Reserve, who is supposed to purchase leftover bonds in the market. Interest rates fell slightly last week reflecting that most investors believe the Federal Reserve will continue to function as the buyer of last resort.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 8/24/20


The National Federation of Independent Business (NFIB), the largest small business association in the U.S., released their small business optimism index for July showing a slight pullback after two months of the strongest gains on record.8 The components of their index were largely mixed in July reflecting concerns over the recovering economy. Interestingly, NFIB also polls small business owners regarding their biggest challenges in current times. During prior economic recessions, the largest problem for small businesses was “poor sales”.


To be sure, there was a temporary spike in “poor sales” in their surveys from March and April. However, the largest reported problems that small businesses currently face is the “cost or quality of labor” as well as “taxes and government red tape”.9 We have all read the stories of Congress mishandling the recent fiscal stimulus checks. It now appears that our representatives cannot come to an agreement regarding further assistance from Congress. Small business owners are feeling the pain of our dysfunctional Congress!

Source: Bespoke Investment Group, The Bespoke Report, 8/14/20

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 – Another Rotation?”, 8/25/2020
  2. Bespoke Investment Group, The Bespoke Report, 8/21/20
  3. Bespoke Investment Group, The Bespoke Report, 8/21/20
  4. Bespoke Investment Group, The Bespoke Report, 8/21/20
  5. Bespoke Investment Group, The Bespoke Report, 8/21/20
  6. Bespoke Investment Group, The Bespoke Report, 8/21/20
  7. Bespoke Investment Group, The Bespoke Report, 8/21/20
  8. Bespoke Investment Group, The Bespoke Report, 8/21/20
  9. Bespoke Investment Group, The Bespoke Report, 8/21/20