Weekly Investment Newsletter (SITREP) – July 6, 2020

Stock markets around the world continue to rise despite deep concerns from individual investors. Research continues to show that investors are nervous about stocks and anticipate another major pullback. Reports show more than $6 trillion invested in money market funds around the world while investors are putting more money into bond mutual funds and ETF’s than stock investments of the same type. The American Association of Individual Investors (AAII) released their monthly survey showing bullish sentiment in the bottom 5% of all time since the beginning of the surveys in 1987.1

 

U.S. stocks recorded solid gains for the holiday-shortened week, helping to lift the technology-heavy NASDAQ Composite Index to a record intraday high.  The large cap S&P 500 hit its highest level since mid-June.  The week closed out the best quarter for the Dow Jones Industrial Average and the S&P 500 since 1987 and 1988, respectively.2  The Dow Jones Industrial Average added 812 points to finish the week at 25,827, a gain of 3.2%.  The NASDAQ added 450 points and finished at 10,208, a 4.6% increase.  By market cap, large caps led the way with the S&P 500 adding 4.0%, while the mid cap S&P 400 and small cap Russell 2000 rose 3.5% and 3.8%, respectively.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 7/6/20

 

For the month of June, the NASDAQ Composite was the clear winner, gaining 6.0%, followed by the small cap Russell 2000, up 3.4%.  Large caps, mid-caps, and the Dow rose 1.8%, 1.1%, and 1.7%, respectively.  For the second quarter, there were double-digit gains across the board.  The NASDAQ surged a huge 30.6%, followed by the small cap Russell 2000, up 25.0%.  The S&P 400 and S&P 500 gained 23.5% and 20.0%, respectively, and the Dow Jones Industrials added 17.8%.3 Recent gains have been buoyed by improvement in the materials sector along with the real estate and utilities sectors. All three of those sectors are laggards for the year but saw strength last week with the new quarter.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 7/6/20

 

Major U.S. indexes, although volatile, have been moving sideways since June 8th. The markets saw a surge of selling in the last two weeks of June that is commensurate with the portfolio rebalancing normally seen after a strong quarter of stock returns. Many hedge funds, pensions and balanced mutual funds have a mandated balance of stocks versus bonds to maintain. After a quarter of strong performance in either direction, it is common to see significant buying or selling as those portfolio managers are required to bring their portfolio back in line with their mandate.

 

We have often written about measuring the strength of a bull market using the cumulative advance/decline (A/D) lines. Cumulative A/D lines literally measure the number of stocks advancing compared to the number of stocks declining over a set period. Rising A/D lines generally point to a broader strength in the market while declining lines dictate general weakness among stocks. A healthy bull market will typically see an increasing A/D line rising ahead of the index itself. Recently, the weakness in small companies has caused lagging A/D lines in multiple indexes.4

Source: Bespoke Investment Group, The Bespoke Report, 7/2/20

 

Financial media often quote the CBOE Volatility Index (VIX) as a common measurement of risk in the markets. The VIX index historically is lower when stocks are rising and higher when markets are falling. The VIX was at record lows for most of 2019 while stocks recorded significant gains, however it rose quickly in February of 2020 when markets began to slide.

 

The prior quarter was unusual as stock indexes generally rose while the VIX remained elevated. Bespoke Investment Group reports that the average VIX reading of 34 during the second quarter was even higher than the first quarter when stocks experienced their largest declines. Further, there has never been a quarter where the S&P 500 Index was up more than this recent quarter when the average VIX reading was above 30.5

Source: Bespoke Investment Group, The Bespoke Report, 7/2/20

 

Analysts are always looking for reliable predictors of future stock market outperformance. There are few sectors that consistently led the markets lower or higher like the transports did for many decades in the 70’s, 80’s and 90’s. For the better part of the 21st century, analysts have noted the dependability of the semiconductor index for gauging overall market health. Semiconductors have become an integral part of most U.S. sectors, therefore when the economy changes pace, the semiconductors feel it first.6 If the recent performance of semiconductor company stocks were our primary indicator, future economic growth looks positive.

Source: Bespoke Investment Group, “Russell 1,000 Decile Performance, 7/2/20

 

Our investment committee continues to rely heavily on our risk models to determine where investment risk is the highest. If you have listened to any of our recent webinars, you have likely heard us say that non-U.S. stocks have exhibited unfavorable risk versus return scenarios to the extent that we have eliminated most international stocks from our client portfolios. In fact, U.S. stocks have enjoyed more than a decade of outperformance compared to their international peers. Recall that the European Central Bank adopted their “negative interest rate policy” in 2014 and European economies continue to move well below traditional growth rates. The relative performance of the S&P 500 Index to the broad international index continues to show the advantage of a U.S.-centric portfolio.7

Source: Bespoke Investment Group, The Bespoke Report, 7/2/20

 

The July quarterly earnings season may be the most important earnings reports we have received in years. The expectations for corporate earnings after the economic shutdown remain a mystery. We have reported in recent issues of the SITREP that a large majority of U.S. companies have refrained from offering any guidance about what to expect for second quarter earnings performance. Factset Insight recently shared that analysts now expect a 28% decline in earnings estimates for 2020, the largest such decline every recorded since the data began in 1996.8 The average annual decline over the prior 15 years has been 2.6%.

Source: Factset Insight, John Butters, 7/6/20

 

We enter the new quarter with a rosy outlook from our market indicators as all four indicators return to positive status. Recall from prior presentations that historical market performance when all indicators are positive is well above the long-term average. Over the last 20 years when the three timed indicators (long term, intermediate and short term) are positive, the S&P 500 has a compound annual growth rate of more than 18%. When only one indicator is negative, the compound annual growth rate falls to just over 5%. When all three indicators are negative (only 6% of all days since 2001), the compound annual growth rate of the S&P 500 falls to negative 49%!

More analysts continue to focus on interest rates as a key determinant for future economic growth. The 10-year U.S. Treasury remains in a narrow trading range between 0.65% and 0.75% while the 30-year U.S. Treasury remains comfortably below 1.5%. The Federal Reserve is committed to keeping all interest rates low to accommodate for economic recovery around the world. There will continue to be a delicate balance between market forces pushing interest rates higher and Federal Reserve policies to argue rates lower. Keep a close eye on these rates to determine the future of the economy and markets.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 7/6/20

 

As the effects of quarantine have changed so much consumer behavior, more and more Americans are dependent on Amazon.  The e‑commerce behemoth’s stock sits at all-time highs, and its president, Jeff Bezos, is (by far) the richest man in the world.  Everyone knows that Amazon is big in the retail space, but just how big may surprise many.  VisualCapitalist created an infographic showing Amazon’s valuation compared to the country’s nine next-largest retailers.  In short, the market valuation of all the next nine companies, from Costco to Walmart, added together still lag Amazon’s by almost half a trillion dollars.9

Source: www.visualcapitalist.com

 

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, 7/2/20
  2. J.P. Morgan Asset Management, Weekly Market Recap, 7/6/20
  3. J.P. Morgan Asset Management, Weekly Market Recap, 7/6/20
  4. Bespoke Investment Group, The Bespoke Report, 7/2/20
  5. Bespoke Investment Group, The Bespoke Report, 7/2/20
  6. Bespoke Investment Group, The Bespoke Report, 7/2/20
  7. Bespoke Investment Group, The Bespoke Report, 7/2/20
  8. Factset Insight, John Butters, 7/2/20
  9. visualcapitalist.com, Dorothy Neufeld, 7/2/20
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