Weekly Investment Newsletter (SITREP) – June 15, 2020

U.S. stocks suffered their worst weekly decline in almost three months as investors took profits from recent gains and responded to elevated worries of a second wave of COVID-19 cases. The concerns dampened the optimism surrounding the reopening which had been a key catalyst driving the big rally off the March lows.

Slower-growing value stocks surrendered their recent market leadership and recorded the steepest drops while smaller-cap shares also underperformed. The Dow Jones Industrial Average dropped over 1500 points to finish the week, a decline of -5.6%. The technology-heavy NASDAQ Composite fared best among the indexes, giving up -2.3%. By market cap, the large cap S&P 500 declined -4.8%, while the mid-cap S&P 400 and small-cap Russell 2000 each declined -7.9%.
Source: J.P. Morgan Asset Management, Weekly Market Recap, 6/15/20

The “tale of two markets in 2020” continued last week as we saw a throwback to market trends in February and March. As the market declined for the week, the same sectors that outperformed during the original decline worked once again. The losers for the week included familiar names in energy, financial services, and basic materials. Large companies fared better than small companies did while growth companies went down less than value companies. Dividend-paying stocks were among the hardest hit stocks for the week, like their fate in March.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 6/15/20

The seesaw market this year has left many investors wondering what direction markets could take next. Given the uncertainty on economic growth, as well as the lack of guidance on corporate earnings, there is bound to be additional volatility through the summer and fall. Finviz.com has an interesting method for examining stock returns for the year. The “tile chart” groups sectors separately while tile sizes correlate to the relative size of the companies. The color-coding reveals ranges of returns where green is best, as expected. The year-to-date chart has a lot of red and the clear winners are familiar names to investors.

Source: Finviz.com; 6/15/2020

Bespoke Investment Group updated their decile analysis last week. The results were reminiscent of the market decline we saw earlier this year. Stocks with the lowest valuations measured by P/E ratio were the hardest hit last week. The recent market gains from market lows has set many records. The market has also failed to follow traditional technical patterns leaving many professional money managers on the sidelines of this rally. In another non-traditional pattern, the stocks that have performed the best since the market low on March 23rd were also down the most last week.1

Source: Bespoke Investment Group, The Bespoke Report, 6/12/20

The number of Americans applying for first-time unemployment benefits declined for a tenth week in a row as the labor market continued to recover. The Labor Department reported 1.54 million Americans applied for jobless benefits last week. Economists had expected 1.6 million new claims to be filed. The number of new applications has continued to decline since peaking at almost 7 million in late March, but they remain at an extremely high level. New claims had averaged around 200,000 at the beginning of the year—a 50-year low. Continuing claims, which counts the number of people already receiving benefits, also declined falling 355,000 to 1.542 million. That number is reported with a one-week delay.2

Small-business owners turned more optimistic about the economy last month expecting that the coronavirus-induced recession will be “short-lived”, according to a closely followed survey. The National Federation of Independent Business (NFIB) reported the optimism of small companies rose 3.5 points last month to 94.4. The increase was a surprise at double the consensus forecast. The index had tumbled in March by the most on record as the pandemic slammed the economy and, especially, small businesses.3 While last month’s reading showed an improvement, the overall outlook remains uncertain.

Source: Bespoke Investment Group, The Bespoke Report, 5/29/20

Investors continue to look for the effects of the economic shutdown on corporate earnings. John Butters at Factset reports that one-third of S&P 500 companies have given no guidance on what to expect for second quarter earnings results. Stock analysts have given the largest cuts to earnings estimates since Factset began tracking the data in 1996. As suspected, the economic shutdown has affected market sectors in various ways. The utilties sector appears to be least affected by adjusted earnings expectations while the energy, consumer discretionary and industrial sectors are expecting better than 50% reductions in expected earnings. The overall earnings estimate for the S&P 500 Index is down by more than 28% during the same time period.4

Source: Factset Insight, John Butters, 6/12/20

The energy sector has been the one to watch in 2020. We have seen extreme volatility in oil prices and investories. As of last week, oil inventory levels are once again at record highs despite domestic production pulling back significantly. It is refreshing to see the latest demand trends for gasoline as the economy reopens, however, overall demand is still at the weakest level since 2001. Energy stocks have recovered from their March lows, but appear to be consolidating lower again over the last week. Technical analysts do not like to see the converging moving average lines shown in the chart below. Converging moving average lines indicate the uncertainty that lies ahead for the energy sector.5

Source: Bespoke Investment Group, The Bespoke Report, 6/12/20

Our market indicators are back to a neutral position after the market decline last week. The short-term indicator turned negative on Thursday after we saw four individual sectors reflect weaker demand that day. The quarterly trend indicator remains negative for the quarter, although the daily calculations for that indicator will turn positive at the end of this quarter unless markets deteriorate rapidly. The long-term and Balance of Strength signal remain in positive modes despite the added volatility.

Interest rates returned to ranges we have seen since April. The benchmark 10-year U.S. Treasury Bond closed the week at 0.71% reflecting the uncertainty in future economic growth. As we have stated before, rising interest rates would be indicative of expected economic growth in the future. The disparity between improving stock performance and continually lower interest rates reveals the struggle in the market between an economy recovering or stalling.

There is a bigger story at play in the interest rate markets as well. While we would like to believe that interest rates are a true measure of economic performance, many analysts note that they are hesitant to believe interest rates are a true gauge of expectations when the Federal Reserve is the largest (and sometimes only) buyer in the bond markets. Frankly, the role the Fed has taken on has affected both stock and bond markets. Traditional technical and fundamental analysis have less effectiveness due to Fed promises and actions. We continue to exercise caution with our investment process given the unorthodox reactions the market has shown to Fed policy.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 6/1/20

If it seems like there are a lot more cars on the road now than there were just a few weeks ago, you are not mistaken. The Energy Information Administration (EIA) reported weekly fuel deliveries to retail gas stations have recovered to 88.6% of pre-coronavirus levels. After hitting a low of 5.1 million barrels of fuel in the first week of April, fuel deliveries last week rose to 7.9 million. Evidently, some of those cars are carrying people to destinations to which they previously would have flown: the Transportation Security Administration (TSA) reports that air travel through the first week of June remains down a whopping 81.6% from pre-coronavirus levels.

 

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, 6/12/20
  2. Bespoke Investment Group, The Bespoke Report, 6/12/20
  3. Bespoke Investment Group, The Bespoke Report, 6/12/20
  4. Factset Insight, John Butters, 6/12/20
  5. Bespoke Investment Group, The Bespoke Report, 6/12/20
Login