Weekly Investment Newsletter (SITREP) – July 27, 2020

Risks continue to rise in U.S. stock markets as the major indexes closed lower last week. Earnings season has been relatively positive so far, but stock prices are experiencing lackluster reactions to those earnings.1 Some analysts believe that the rise in stock prices from April and May accounted for the earnings reports that we are now receiving. Market valuations as measured by P/E ratios remain elevated while the largest stocks represent a growing percentage of the indexes.


The major U.S. indexes finished the week mostly down after surrendering gains made early in the week.  At its peak on Thursday the S&P 500 moved within about 3% of its all-time high set in February.  The Dow Jones Industrial Average gave up 202 points finishing the week at 26,470, a decline of -0.8%.  The technology-heavy NASDAQ Composite declined for a second consecutive week, ending down -1.3%.  By market cap, the indexes finished the week mixed.  The large cap S&P 500 declined -0.3%, while the mid cap S&P 400 and small cap Russell 2000 rose 0.7% and declined -0.4%, respectively.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 7/27/20


Market performance and leadership over the last week was a complete reversal of recent trends. We have repeatedly stated that there have been few years where the cost of being wrong is so great as in 2020. There remains a substantial difference in returns between the various asset styles. Traditional asset allocation models invest blindly across all asset styles (large vs. small / growth vs. value) regardless of the risk inherent in each style. Measuring risk levels and gauging demand have helped our investment committee avoid allocations to the worst performing asset styles.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 7/27/20


Although market indicators remain positive, the ascent in absolute levels of each indicator have slowed over the past week. Recent economic data suggests that the U.S. economy continues to recover from the worst impacts of the shutdown. Although questions remain about another economic shutdown in the next few months, the economy continues to show declines in new unemployment claims with national unemployment at 11.1%. We expect to receive early reports of second quarter GDP growth this week – estimates are calling for anything between a 15-35% decline.2 The uncertainty around economic growth is weighing on stock prices and investor demand.

The S&P 500 Index finally breached the high made on June 8th after trading lower for the last six weeks. While the return to recent highs is a positive trend, analysts note a lack of follow through beyond the 3257 level. Andrew Adams of Saut Strategy noted the multiple levels of resistance the index has worked through in June and July (see chart below). He further showed the lack of resistance from the current levels of the S&P 500 up to the last all-time highs in February at 3386.3 Technical analysis experts believe that markets should move easily higher when there is a lack of resistance.


Adams recently wrote in a “Trading Flash” for institutional clients:

“Overall, there is a debate right now whether the recent trading range represents just a rotation and

rebuilding period before the next move higher, or the exhaustion of a rally on its last legs that will

ultimately succumb to a correction. I’ve seen arguments made on both sides and where one stands on

the subject often just reflects the built-in biases that one has about the market. As a technician, I try to let the market do my thinking and right now the market is still sending mixed signals that make it

difficult to feel confident in wagering heavily on either outcome. The “good” days haven’t been as good and the “bad” days haven’t been as bad as the cap-weighted averages have made them appear lately. We have really needed to drill down and look at a number of different measures to get a better idea of what the market is doing each session.”


Source: Saut Strategy, Andrew Adams, Charts of the Week, 7/22/2020


Our Engrave Wealth portfolio models have favored growth over value for the last three years. Our research process identified higher risk levels in value stocks, including dividend-paying stocks in 2017 that has persisted until today. The recent outperformance for growth has hit record levels over the last 100 days. According to Bespoke Investment Group, as of Friday, July 24th, the S&P 500 Growth Index is up 14.5% compared to a decline of 7.9% for the S&P 500 Value Index.4 The last time we saw such a spread between these two indexes was in December 1999 before the dot-com bubble burst.

Source: Bespoke Investment Group, The Bespoke Report, 7/24/20


The market decline in March caused many fundamental measures of the index to be skewed. For example, we have read a number of articles recently stating that stocks are overpriced. We would agree with the analysis but there are a few caveats to watch in the coming quarter. Stock valuations are typically quoted in terms of P/E (price/earnings) ratios. P/E ratios have been elevated recently due to recovering stock prices combined with significant declines in earnings. The key question to consider is whether current stock prices are fairly valued when earnings begin to recover.

Source: Mauldin Economics, Thoughts from the Frontline, “Valuation Inflation”, 7/24/20


Federal Reserve Chairman Jerome Powell reports that the Fed is using all of its policy tools to help the U.S. economy begin to grow again. Tools include lower interest rates, increasing the availability of money for banking purposes, and the Fed acting as a buyer of all bonds to help the market function smoothly. An additional tool that is not discussed frequently is the Fed’s ability to influence the value of the U.S. dollar relative to foreign currencies.


A weaker U.S. dollar is generally seen to aid U.S. companies with international exposure as their goods and services appear less expensive to foreign buyers. Further, the weaker dollar helps the economic recovery of emerging market countries with currencies pegged to the U.S. dollar. The U.S. dollar is close to its lowest value of the past year against most foreign currencies.5 The lower dollar has boosted investment returns for international and emerging market investments.

Source: Bespoke Investment Group, The Bespoke Report, 7/24/20


We spoke last week to the nature of markets during the summer months. These are historically slower times due to summer travels and a slow news cycle. The average pattern for the S&P 500 Index shows a summer high by July 26th and trending sideways or down until mid-October. Over the last ten years, the median performance for the index is a decline of 1.19%. The average 1-month performance is a decline of 2.4%. According to Bespoke Investment Group, of all the rolling one-month periods throughout the year, the upcoming month looks worse than every other month.6

Source: Bespoke Investment Group, Bespoke’s Morning Lineup, 7/28/20


U.S. interest rates dipped again last week as the 30-year U.S. Treasury Bond fell to 1.23%. Economic uncertainty, as well as the Fed’s best efforts, continue to keep interest rates in check. The pressures from low rates fall on investors looking for yield and financial institutions who rely on the spread between long and short-dated rates for profits. Benefactors of lower rates include homeowners as most mortgage rates are now below 3%. Recent mortgage applications have risen steadily while opportunities for refinancing abound for homeowners. Building activity has increased in most cities across the U.S. providing a boost for homebuilders.7

Source: J.P. Morgan Asset Management, Weekly Market Recap, 7/27/20


This year has been the greatest challenge for the energy industry since 2016. The world was already experiencing slower global growth (thus, slower demand for energy products) before the economic shutdowns. The industry also faced growing supplies early in the year as Russia and Saudi Arabia held multiple discussions over an OPEC+ supply cut. The combination of weak demand and record supplies resulted in erratic oil prices through March and April. The result? A substantial increase in bankruptcies for the industry as companies deal with massive cutbacks and heavy overhead costs.8 Many companies are feeling the squeeze from debt taken on in 2015-2016 to sustain operations.

Source: Visualcapitalist.com, July 24, 2020

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, 7/24/20
  2. P. Morgan Asset Management, Weekly Economic Update, 7/27/20
  3. Saut Strategy, Andrew Adams, Charts of the Week, 7/22/20
  4. Bespoke Investment Group, The Bespoke Report, 7/24/20
  5. Bespoke Investment Group, The Bespoke Report, 7/24/20
  6. Bespoke Investment Group, The Bespoke Report, 7/24/20
  7. Bespoke Investment Group, The Bespoke Report, 7/24/20
  8. com, Tracking the Growing Wave of Bankruptcies in the Oil & Gas Industry, 7/24/20