Weekly Investment Newsletter (SITREP) – August 31, 2020

We stand corrected! Recent issues of the Weekly SITREP Investment Updates have stressed the normally weak performance for stocks in the month of August. To continue the “anomalies of 2020”, the month of August just turned in one of the best monthly returns (S&P 500 Index up more than 6%) in history. Bespoke Investment Group noted that 85% of all trading days in August (17 day) saw positive returns for the S&P 500 ETF (SPY), the highest monthly winning percentage for the fund since it began trading in 1993.1

U.S. stocks continued to grind higher on largely positive news flow about potential vaccines and treatments for COVID-19.  Continuing the recent prevailing trend, higher-valuation growth stocks outperformed lower-priced value companies and large-cap companies easily outpaced small-caps.  The Dow Jones Industrial Average added 724 points finishing the week at 28,654, a gain of 2.6%.  The technology-heavy NASDAQ Composite rose for a fifth consecutive week, gaining 3.4%.  By market cap, the large cap S&P 500 added 3.3%, while the mid cap S&P 400 and small cap Russell 2000 indexes finished up 1.9% and 1.7%, respectively.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 8/31/20

 

We searched hard to find a losing investment last week for stock sectors and only found one – utilities! The communications sector advanced strongly last week followed by technology and financial stocks. Recent trends have shown weakness for health care companies as the sector was up barely 1% last week. The energy sector continued to lag last week as it has done for much of the year. There remains a significant performance gap between large companies and small companies for 2020. The large growth and mid growth stocks are better than any other category by aa significant margin this year.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 8/31/20

 

There was little change in our Global Dynamic Risk Management models as we close the month of August. While all the indicators remain positive, the rate of change has slowed. Many comments have been made regarding a small number of stocks leading the market higher. We are not concerned about the concentration of current winners since the market has not seen many stocks falling during the current environment. Our research shows the leading asset styles remain the same; the NASDAQ 100 Index, large growth, large blend, and mid growth categories reflect stronger demand than the rest.

While the S&P 500 Index continues to trade near record highs, we wonder where stocks go from here. Recent surveys continue to show most individuals are skeptical about future returns. However, our investment committee recently noted several positive developments that have helped the markets including better than expected economic data, general improvement in COVID-related affects, and strong demand for stocks from large investors and institutions. More significantly, we note the recent change in policy from the Federal Reserve Board discussed last week by Chairman Powell. The Fed has decided to let inflation run above normal targets to bring the economy back to lower employment and traditional GDP growth.

Source: Bespoke Investment Group, The Bespoke Report, 8/28/20

 

We have spoken often about the disparities between various investments in 2020. The difference in returns between large companies and small companies remains notable. However, the greatest divergence in the market lies in the different sectors of the market. There is 70%+ difference between the best and worst sectors.2  Once again, the asset allocation model that evenly invests across all sectors is likely to see negative returns for the year rather than focusing only on sectors with the best risk/return characteristics.

Source: Bespoke Investment Group, The Bespoke Report, 8/28/20

 

The second quarter earnings season was one for the record books. The headlines focused on record earnings growth for U.S. companies – 86% of companies in the S&P 500 beat their earnings estimates. Additionally, the average earnings results were 23% better than estimates, nearly five times the five-year average. However, you may not be aware that analysts had marked their earnings estimates down by a record amount before earnings season began. The aggregate earnings per share were down by an annualized 37% in the second quarter, the largest decline for a quarter since Factset began reporting the data in 2002.3

Source: Factset Insight, John Butters, “Record Performance vs EPS Estimates by S&P 500 Companies in Q2”, 8/28/20

 

Bespoke Investment Group provides a monthly report that accounts for the economic reports released by the various government entities. Bespoke has created a “diffusion index” measuring the difference between reports that beat expectations compared to those that come in below expectations. The Diffusion Index has reached a near-term high as recent economic data continues to support a recovering economy. The better-than-expected reports have led the index higher for six straight months. July and August data remain positive but the rate of growth is slowing.4

Source: Bespoke Investment Group, The Bespoke Report, 8/28/20

 

We receive one question consistently: “what could cause interest rates to rise?”. We saw that scenario play out twice in the last few weeks. A less-than-enthusiastic Treasury auction for 20-year Treasury Bonds and 30-year TIPS (inflation protected Treasuries) caused long-term interest rates to rise about 0.25% a few weeks ago.5 Then last week the Fed announced their intention to tolerate higher inflation and longer dated Treasuries sold off again. Bespoke notes the 10-year and 30-year Treasury both broke long-term downtrends with higher yields.6

Source: J.P. Morgan Asset Management, Weekly Market Recap, 8/31/20

Source: Bespoke Investment Group, The Bespoke Report, 8/28/20

 

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


Footnotes:

  1. Bespoke Investment Group, The Bespoke Report, 8/28/20
  2. Bespoke Investment Group, The Bespoke Report, 8/28/20
  3. Factset Insight, John Butters, “Record Performance vs EPS Estimates by S&P 500 Companies in Q2”, 8/28/20
  4. Bespoke Investment Group, The Bespoke Report, 8/28/20
  5. Bespoke Investment Group, The Bespoke Report, 8/28/20
  6. Bespoke Investment Group, The Bespoke Report, 8/28/20
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