Weekly Investment Newsletter (SITREP) – July 13, 2020

Stock market divergence continues to be a significant theme we follow. While broader indexes consistently rise (except for small companies), the disparities between specific indexes and stocks within the index remain. Individual investors appear skittish as fund flows show large withdrawals from stock mutual funds while bond funds have seen the largest inflows since 2013.1 Combining these data points confirms our oft-repeated opinion that this is a risky time to own broad index funds. Tactical index offerings and individual stocks are our preferred method of stock exposure in 2020.


The major U.S. indexes ended the week mixed, with large caps outperforming small caps.  The technology-heavy NASDAQ Composite outperformed the other major indexes by rising 4.0% to a new record high of 10,617.  The Dow Jones Industrial Average rose 1.0% finishing the week at 26,075.  By market cap, the large cap S&P 500 finished the week up 1.8%, while the mid cap S&P 400 and small cap Russell 2000 retreated -0.3% and -0.6%, respectively.  Despite numerous short bursts of outperformance, small and mid-caps have yet to mount a sustained period of outperformance and remain substantially negative for 2020 at -14.7% for the Russell 2000 small cap index and -14.1% for the S&P 400 mid cap index.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 7/13/20


The chart below reminds us of the divergences between various parts of the index. The difference between large growth returns and small value approaches 40% while the gap between large growth and large value remains over 30%. Sectors reveal similar patterns where technology and consumer discretionary sectors have outperformed financials and energy sectors by more than 35% this year.


The S&P 500 Index is often misleading due to the structure of the index – the 502 stocks are not equally represented in the index. The index is calculated based on the size of each company; therefore, the largest stocks receive a heavier weighting in the index. Although the index is down only 0.28% for the year, an equally weighted S&P 500 Index would actually be down more than 10% in 2020.2

Source: J.P. Morgan Asset Management, Weekly Market Recap, 7/13/20


No change in our market indicators last week as all four remain in positive territory. When indicators remain positive for extended periods, we pay close attention to the daily indicator values for potential trend changes. The long-term indicator reflects caution as the daily indicator value remains in the low-60’s since late April. Despite markets moving higher, the internal measurements of demand tell us that not all stocks are participating in this rally equally.


Many writers describe the last six months as feeling like multiple years and the stock market would show a similar pattern. Bespoke Investment Group does an excellent job of reporting the various phases of the S&P 500 Index this year. The first two months were led by technology and consumer discretionary sectors. The downturn in February and March broadly affected all sectors but the early recovery in April and May saw pronounced outperformance by technology, health care and energy companies. Industrial and financial stocks had a brief surge for three weeks in May and early June as we heard about economic “reopenings” in many states.

Source: Bespoke Investment Group, The Bespoke Report, 7/10/20


The turn in markets on June 8th has been marked by dramatic changes in leadership for the market. Those stocks that performed the best during the reopening phase of the economy have been punished hard for the last six weeks. Many analysts have written that the market sentiment shifted when the presidential polls showed favor toward Biden and the number of COVID cases began to rise again. The best performing stocks during April and May are down nearly 30% collectively since June 8th.3 Yet the stocks least affected by economic shutdowns continue to outperform.

Source: Bespoke Investment Group, The Bespoke Report, 7/10/20


Speaking again to the divergences within the index, analysts are noticing the lack of participation by certain stocks despite the rising market. Even within the surging technology sector, the number of stocks moving higher seems to have stalled. Just six weeks ago, better than 95% of all technology stocks were trading higher than their 50-day moving average. That number has fallen below 75% recently and is trending lower.4 We continue to see the biggest stocks drive markets higher as the top three companies in the S&P 500 are each valued at more than $1.5 trillion. If Apple alone were to double from here, the index would rise 6%. However, if the bottom 100 stocks in the S&P 500 were to double the index would only rise 2.5%.5

Source: Sentimentrader.com, Jason Goepfort, 7/10/20


Earnings season has finally arrived! We have previously shared charts describing the lack of guidance provided by U.S. companies for second quarter earnings reports. When companies fail to offer guidance on what to expect for earnings, the stock analysts are left to decide for themselves what could happen. In the first quarter, analysts were expecting corporate earnings to drop by more than 15%, but actual earnings only fell by 6.9% as stock prices were largely unaffected by earnings announcements.6 Analysts have responded in the second quarter by raising earnings expectations for most sectors. Consumer staples, energy and technology companies are poised to deliver earnings that are 20% better than was originally forecast.7 Given the history of analysts expectations being more exaggerated than reailty, there is reason to be concerned that some companies may not live up to their renewed expectations.

Source: Bespoke Investment Group, The Bespoke Report, 7/10/20


Despite the recent increase in earnings expectations for U.S. companies, John Butters at Factset Insight reports that overall earnings should be the largest year-over-year decline since 2008. Once again, the actual decline may not matter as investors will focus on whether earnings are as bad as expected. Earnings from the S&P 500 companies are expected to decline by 44% for the second quarter of 2020. Over the last five years, 72% of companies have reported actual earnings better than analyst expectations (per prior paragraph) by an average of 4.7%.8 The key question is whether analysts will focus on actual earnings results or the relative result compared to expectations. Stock prices normally rise when actual earnings beat expectations.

Source: Factset Insight, John Butters, 7/10/20


Interest rates remain in focus as U.S. Treasury rates fell nominally last week. Lower interest rates will affect many things including home mortgages, savings rates, and pension retirement calculations. The Federal Reserve is incented to keep interest rates low while economic uncertainty reigns around the world. Negative interest rates in Europe continue to make it difficult for European governments to issue new bonds and find willing buyers. The Federal Reserve meets next on July 28-29 to discuss policy changes.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 7/13/20


Complications from COVID-19 are known to be more severe in older populations and observers have speculated whether COVID-19 will force or at least encourage older workers to retire as early as they can.  Analysts believe the answer is ‘yes’.  For many years, financial advisors have been encouraging pre-retirees to wait as long after age 62 as possible before claiming Social Security benefits, in order to maximize the benefits and extend the wage-earning years.


Beginning about the year 2000, a steady decline in the percent of 62-year olds claiming social security benefits began, and has since dropped by about half, from the 60% range to the 30% range.  During the Great Recession, though, the percentage of 62-year-olds claiming Social Security spiked from 42.2% in 2007 to 46.9% in 2009 before again dropping back to the downtrend.  Analysts expect this pattern to repeat itself in the wake of COVID-19.  In fact, preliminary data from the monthly Current Population Survey shows that an uptick in earliest-possible retirements and social security claims has already begun.

Source: Center for Retirement Research, Boston College


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. Bespoke Investment Group, The Bespoke Report, 7/10/20
  2. Bespoke Investment Group, The Bespoke Report, 7/10/20
  3. Bespoke Investment Group, The Bespoke Report, 7/10/20
  4. sentimentrader.com, 7/10/20
  5. Bespoke Investment Group, The Bespoke Report, 7/10/20
  6. Factset Insight, John Butters, 7/10/20
  7. Bespoke Investment Group, The Bespoke Report, 7/10/20
  8. Factset Insight, John Butters, 7/10/20