Weekly Investment Newsletter (SITREP) – June 29, 2020

The last few weeks have seen an increase in market volatility in normal ranges partially due to the end of quarter. When stocks experience a rapid increase or decrease in prices within a quarter, portfolio managers of balanced funds and pensions are required to rebalance their portfolio back to mandated allocations. After a significant rise in stock values this quarter, we expected to see some selling pressure towards the end of the month as large funds are forced to sell stocks as part of their required allocations.

 

Additionally, worries over the resurgence of the coronavirus offset the enthusiasm over some positive U.S. economic reports; most U.S. markets gave back all the previous week’s gains—and then some.  The Dow Jones Industrial Average fell 859 points finishing the week at 25,016—a decline of -3.3%.  The technology-heavy Nasdaq Composite gave up half of last week’s gain declining -1.9%.  By market cap, the large cap S&P 500 retreated -2.9%, while the mid cap S&P 400 fell -3.7%, and the small cap Russell 2000 ended down -2.8%.1

Source: J.P. Morgan Asset Management, Weekly Market Recap, 6/29/20

 

Stock markets have entered a downtrend since June 8th. The S&P 500 Index closed at 3232 that day and now sits at 3009, a decline of nearly 7%. Recent market activity is reminiscent of the decline in February and March where technology and discretionary stocks are down significantly less than the rest of the market. The disparity of returns in various indexes continues to be wider than historical norms. There is greater than 20% difference in returns between the NASDAQ and Dow Jones Industrial Average. Returns for large growth companies and large value companies are more than 25% apart.2

Source: J.P. Morgan Asset Management, Weekly Market Recap, 6/29/20

 

The chart for the S&P 500 reflects the recovery that has happened in two primary stages. The first move higher was in April and then the market traded sideways for most of May. The second stage was short-lived from late May into the first week of June. Technical analysts note that the 50-day moving average and 200-day moving average of the index continue to converge but have not crossed yet. The market appears to react daily to the most recent headlines with greater volatility than we saw in May. One significant turning point could be in July when we begin to hear the results of second quarter earnings for most companies.

Source: Bespoke Investment Group, The Bespoke Report, 6/26/20

 

As of Friday, the S&P 500 Index was up 17.3% for the second quarter ranking as one of the best all-time returns for a quarter. Many other U.S. stock indexes have enjoyed excellent returns this quarter as well. If the last two days are enough to push the S&P 500 to a 20% gain, this will be the first time since 1932 that a 20% decline in one quarter was followed by a 20% gain in the next.3 This is an exceedingly difficult time to make predictions about the next quarter since we have seen dramatic volatility in stock prices since February, greater uncertainty about the economy going forward and a toxic political environment leading to an election in November.

Source: Bespoke Investment Group, The Bespoke Report, 6/26/20

 

Bespoke Investment Group does an excellent job of analyzing recent market returns by various measure to help us understand what has happened. Their most recent decile analysis reveals some interesting trends. We already mentioned that since the market peaked on June 8th, we have seen a return to trends that took place between February and March 2020. From June 8th until Friday, the average stock in the large-cap Russell 1000 Index is already down 11.44%. However, this follows a period from March 23rd until June 8th when the average stock was up nearly 65%.4

 

Further, the largest companies in the index are down less than the smallest companies during the last three weeks. Lower valued companies measured by P/E ratios are down twice as much as the highest valued companies during the same time. Finally, stocks that rallied the most between March 23rd and June 8th have now been down nearly three times as much as those that performed the worst during April-May.5

Source: Bespoke Investment Group, “Russell 1,000 Decile Performance, 6/26/20

 

Most public companies report earnings to investors quarterly starting the second week of a new quarter. By that time, most companies have issued some form of guidance to help analysts determine forecasted earnings growth. However, given the uncertainty surrounding the economic shutdown, more than one-third of S&P 500 companies have withdrawn their earnings guidance for 2020. According to Factset, only 49 companies in the S&P 500 have offered input for second quarter earnings in July, which is 53% below the five year average and the lowest number ever recorded. Of the 49 companies who provided guidance, more than half are expecting lower earnings in the second quarter. The majority of negative earnings guidance comes from the information technology sector.6

Source: Factset Insight, John Butters, 6/26/20

 

The short-term market indicator returned to positive on June 16th as markets continue to experience tremendous volatility. Despite heavy selling on Friday, June 26th, the short-term indicator remained positive as many sectors were already experiencing declining demand. The intermediate indicator only changes at the end of a quarter and we are anticipating it to return to positive based on measures from the second quarter. We are likely to see all four indicators in positive territory for the start of the third quarter. Keep in mind that the indicators measure demand characteristics for various indexes and are helpful in looking beyond headlines into investor activities. We use the indicators to determine when it is safe to accept risk in various areas of the market.

Bonds rallied slightly on news of slower economic growth last week. German interest rates continue in negative territory while the 10-yr Japanese government bond has a yield of 0%. Mortgage rates remain near all-time lows and have spurred continued growth in new home sales. The 30-year U.S. Treasury remains lower as well, forecasting slower U.S. GDP growth in the next few quarters. Comments from recent speeches by Federal Reserve governors have focused on economic activity that appears to have bottomed, but that economic weakness will likely persist for longer than most believe.7 Fed officials continue to campaign for additional fiscal stimulus out of Congress to help the economy recover quicker.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 6/29/20

 

Finally: Can this be true?  If so, the US economy may be in deeper trouble than most think.  Review website ‘Yelp’ reported that of all the business closures since March 1st, 41% are permanent closures.  The Restaurants category is the hardest hit, where Yelp said a whopping 53% are reported to be permanent closures.  That was followed by Shopping & Retail at 35% permanent closures, Fitness at 26% permanent closures, and Beauty & Spas at 24% permanent closures.8

Source: www.yelpeconomicaverage.com, 6/26/20

 

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. J.P. Morgan Asset Management, Weekly Market Recap, 6/29/20
  2. J.P. Morgan Asset Management, Weekly Market Recap, 6/29/20
  3. Bespoke Investment Group, The Bespoke Report, 6/26/20
  4. Bespoke Investment Group, The Bespoke Report, 6/26/20
  5. Bespoke Investment Group, The Bespoke Report, 6/26/20
  6. Factset Insight, John Butters, 6/26/20
  7. Bespoke Investment Group, The Bespoke Report, 6/26/20
Login