Weekly Investment Newsletter (SITREP) – November 2, 2020

U.S. stocks suffered their worst weekly declines since March, as the resurgence in coronavirus cases and election uncertainty weighed on sentiment.  With the narrow exception of the S&P 500 index, all the major indexes fell into correction territory, down over 10% from recent highs.  The Dow Jones Industrial Average shed 1,834 points finishing the week at 26,502—a decline of -6.5%.  The technology-heavy NASDAQ Composite fell for a second consecutive week, giving up -5.5%.  By market cap, the large cap S&P 500 fell -5.6%, while the mid cap S&P 400 and small cap Russell 2000 fell more, -5.7% and -6.2% respectively.

 

International markets were a sea of red this week.  Canada’s TSX gave up -4.4%, while the United Kingdom’s FTSE fell -4.8%.  On Europe’s mainland, France’s CAC 40 shed -6.4% while Germany’s DAX plunged ‑8.6%.  Asian markets fared better; China’s Shanghai Composite declined -1.6% and Japan’s Nikkei retreated ‑2.3%.  As grouped by Morgan Stanley Capital International, developed markets ended down -5.5%, while emerging markets retreated -3.5%.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 11/2/20

There was no place to hide last week as all areas of the market were hit hard by the political uncertainties. Stocks were down 5%+ in all asset classes while gold and bonds felt the losses as well. Small companies had been building a comeback in recent weeks but gave most of it back last week. There was little disparity between large and small companies, as well as growth and value companies. This year’s top performers were among the heaviest sold including technology and consumer discretionary stocks while defensive stocks, such as utilities, went down the least.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 11/2/20

The short-term indicator fell nearly 50% last week as we saw heavy selling pressures in several industry sectors. Recall that the short-term indicator measures 36 industry sectors and subsectors for risk and demand and currently shows only 11 sectors with positive demand. The long-term indicator remains positive falling only a few points over the last week. The higher volatility in other investments, such as oil and gold, convinced investors not to turn too bearish on stocks for the long-term.  You can learn more about our market indicators by watching our monthly “Portfolio Construction” webinar (link here).

 

The U.S. markets were approaching all-time highs just three weeks ago before hitting another patch of volatility in the second half of October. The S&P 500 Index closed last week near the low from the September selloff, well below its 50-day moving average. The total number of stocks trading above their 50-day moving average fell from 46% to 27% last week. The September selloff saw only 25% of stocks above their 50-day moving averages before the market bounced higher into October.1 The greatest challenge has been that market leaders from the lows in March have turned weaker in the last few weeks. Market technicians would like to see both indexes bounce off the lows and approach their early October highs to be convinced that markets have bottomed in this sequence.

Source: Bespoke Investment Group, The Bespoke Report, 10/30/20

The U.S. economy continues to provide evidence of a substantial rebound from the COVID shutdowns. We received the first report of third quarter GDP growth up 33.1% beating estimates of 32%.2 U.S. consumers responded to the economic recovery with continued growth in consumer spending. Bespoke Investment Group reports that the combined economic reports show a fifth straight month of positive readings with 20 different indicators accelerating higher.3 We should continue to watch these reports, however, as eight of the indicators are also pointing to higher expected inflation in the coming year.

Source: Bespoke Investment Group, The Bespoke Report, 10/30/20

Corporate earnings reports continue to impress analysts as the percentage of companies beating earnings estimates for the third quarter is near record levels. As of Friday, 86% of companies in the S&P 500 Index have announced earnings results higher than expectations, well above the five-year average of 73%. Actual earnings are nearly 20% better than analyst estimates which had been raised substantially over the last month.4

 

Recall that analysts are typically more exaggerated in their calculations as estimates for the second quarter were marked down after the economic shutdowns. Companies again delivered much “less loss” than was anticipated and are now showing “more improvement” than had been forecast. Despite the dramatic results from last quarter, the index has reported the third largest year-over-year decline in total earnings. Analysts predict a return to positive year-over-year earnings growth by the first quarter of 2021.5

Source: Factset Insight, John Butters, S&P 500 Earnings Season Update, 10/30/20

While most sectors have reflected the rapid recovery from the March lows, a few sectors have slowed the rebound and are showing weakness in the last month. Health care and consumer staples have been rather flat in recent weeks while energy stocks have seriously struggled. The price of WTI Oil has also recently broken below near-term support levels reflecting the weak demand from global consumers.6

 

The last week saw a 10%+ decline in oil prices as the commodity broke below the $36 per barrel threshold that had been in place for several weeks. Energy stocks continue to be the weakest performers in the index as many are now down more than 50% for the year. The outlook remains bleak as European countries began to announce new lockdowns over increases in the COVID testing rates which should further dampen demand for oil and gasoline.

Source: Bespoke Investment Group, The Bespoke Report, 10/30/20

Longer-dated interest rates continued to climb last week as the 30-year U.S. Treasury Bond crossed 1.65%. Long-term interest rates typically show higher correlations to GDP growth and/or expected inflation levels. Given the massive stimulus from the Fed and additional stimulus from Congress after the election, analysts are expecting the stimulus to have a positive effect and create economic growth in 2021.7 The short-term interest rates will remain more correlated to the Federal Reserve’s interest rate policy. We need to watch these rates carefully for their impact on current bond prices (bond prices fall as interest rates rise, all else being equal).

Source: J.P. Morgan Asset Management, Weekly Market Recap, 11/2/20

The month of November typically falls in the middle of a strong period of returns for the U.S. stock market. Election years can sometimes offer a variance depending on the uncertainty leading up to election day and this year will fit that description. However, the pattern over the last 35 years has consistently shown the month to start strong before fading a bit in the second week.8 The last two weeks must see investors getting in the Christmas mood as returns normally finish strong for the month. The fourth quarter remains one of the best quarters for historical stock market returns. After posting a choppy October, we need to see better returns in November and December to maintain that trend!

Source: Bespoke Investment Group, The Bespoke Report, 10/30/20

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. Bespoke Investment Group, The Bespoke Report, 10/30/20
  2. Bespoke Investment Group, The Bespoke Report, 10/30/20
  3. Bespoke Investment Group, The Bespoke Report, 10/30/20
  4. Factset Insight, John Butters, 10/30/20
  5. Factset Insight, John Butters, 10/30/20
  6. Bespoke Investment Group, The Bespoke Report, 10/30/20
  7. P. Morgan Asset Management, Dr. David Kelly, Weekly Economic Update , 11/2/20
  8. Bespoke Investment Group, The Bespoke Report, 10/30/20
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