Weekly Investment Newsletter (SITREP) – October 12, 2020

The benchmark S&P 500 index had its best weekly gain in three months, as investors seemed to grow more optimistic about a new round of fiscal stimulus as well as treatment options for the coronavirus.  The small-cap Russell 2000 surged over 6%, pulling it back out of correction territory and now within 10% of its 2018 peak.  All major U.S. benchmarks finished to the upside last week.  The Dow Jones Industrial Average added 904 points finishing at 28,587, a gain of 3.3%.  The technology-heavy NASDAQ Composite had its third consecutive week of gains, rising 4.6%.  The large cap S&P 500 added 3.8%, while the mid cap S&P 400 and small cap Russell 2000 rose 4.9% and 6.4%, respectively.

 

Major international markets finished the week in the green.  Canada’s TSX added 2.2%, while the United Kingdom’s FTSE added 1.9%.  On Europe’s mainland France’s CAC 40 rose 2.5%, Germany’s DAX gained 2.9% and Italy’s Milan FTSE added 2.8%.  In Asia, China’s Shanghai Composite rose 1.7% and Japan’s Nikkei added 2.6%.  As grouped by Morgan Stanley Capital International, developed markets rose 2.9%, while emerging markets surged 3.8%.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 10/12/20

 

We saw a rare week where every S&P 500 sector showed positive returns. In fact, analysts report last week was the strongest week for the markets since August. The energy sector saw some welcome relief as it surged more than 5%. It seems odd that nine of twelve sectors were up close to 4% or better, and that names like energy, technology and health care stand together. The small companies were the big winners last week as growth companies continued to pace ahead of value companies in all market cap ranges. The year-to-date returns for value stocks remain negative despite the nice week.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 10/12/20

 

The short-term market indicator showed tremendous strength last week improving more than ten points as markets moved higher. The change in the short-term indicator reflects additional market sectors and industries moving into expansion mode. More simply, we have seen increased demand and lower risks for more areas of the market in the last week. The short-term indicator measures 36 various sectors in the Russell 3000 Index and currently shows 21 of those sectors that exemplify increasing demand Long-term indicators remain favorable for all categories except the energy sector. You can learn more about our market indicators by watching our monthly “Portfolio Construction” webinar (link here).

 

Last week’s market took the S&P 500 back above the February market highs – an important mark considering the severe correction in March and subsequent recovery this summer. The index also handily rose above its own 50-day moving average showing strong technical signs of expansion. Further support for the recent increase was provided as the S&P 500 Cumulative Advance/Decline Line (measures number of stocks advancing compared to declining) reached a new all-time high.1 This market is no longer being lifted by just a handful of stocks!

 

The only concern is that the Russell 2000 (small company index) and the Dow Jones Industrial Average have not yet bettered their February highs. However, both indexes have recently cleared their 50-day moving averages and are showing strong breadth in the number of companies advancing as well. Analysts note strength in the Philadelphia Semiconductor Index recently as a sign that the economy is recovering. The semiconductor index has become known as a fair predictor of U.S. economic growth and market strength.2

Source: Bespoke Investment Group, The Bespoke Report, 10/9/20

 

We showed the chart below last week and described the current S&P 500 Index as fairly priced given the September correction which brought prices back to normal levels. The last two weeks have taken the index right back where it was at the beginning of September relative to its 50-day moving average. The gains have pushed prices two standard deviations above the 50-day moving average meaning that the index is considered extremely overbought in the short-term.3

 

This is not what most investors were expecting for the month of October as sentiment had turned negative given the upcoming elections. Technical analysts would worry that stock prices should reverse closer to the 50-day average in the coming weeks. A preferable result would be a market that changes little for the next few weeks and lets the 50-day moving average “catch up” to current prices.

Source: Bespoke Investment Group, The Bespoke Morning Lineup, 10/14/20

 

Earnings reports began rolling out this week with the financial companies leading the way. Once again, we will be focused on the “relative game” as we recognize that earnings are still recovering from the economic shutdown of the second quarter. A “good earnings report” will, again, be one that shows the company lost less money than was expected for the third quarter. Overall, analysts are expecting earnings for the S&P 500 Index to be down more than 20% for the third quarter.4

 

The second quarter earnings received high marks for winning the relative game. While earnings were expected to be down more than 44%, the end results showed less damage as earnings “only” fell 31%.5 These analysts must be a very gloomy bunch since most quarters show they underestimate the ability of U.S. companies to overcome obstacles and deliver better-than-expected results!

Source: Factset Insight, John Butters, 10/12/20

 

Andrew Adams of Saut Strategy continues to point out declining expectations for market volatility. Obviously, volatility rose significantly during the COVID spike and subsequent market selloff. The most common measure for volatility is the VIX Index quoted by the CBOE. The VIX Index has declined steadily since its March peak with short bursts higher in June and September. Adams notes the favorable pattern of “lower highs” in each of those recent bursts which is a sign of falling expectations for risk in the stock market even though the election is only weeks away.6

Source: Saut Strategy, Andrew Adams, Charts of the Week, 10/14/2020

 

Interest rates rose again last week with both the 10-year and 30-year U.S. Treasury Bonds rising nearly 0.10%. Markets appear to be pricing in another round of fiscal stimulus (government spending) to match the overly accommodative Federal Reserve policy. The argument for higher long-term interest rates is backed with expectations for additional economic stimulus measures that should lead to U.S. economic growth expanding over the next four quarters.7

 

Many economists believe that the recession has ended and that GDP growth for the third quarter should reflect growth of more than 30% quarter-over-quarter. Dr. David Kelly at J.P. Morgan Asset Management reports that the peak GDP growth from the 4th quarter of 2019 will not likely be surpassed until the second quarter of 2021. Long-term interest rates tend to be correlated to GDP growth and inflation expectations. August economic reports show inflation as measured by PCE rose 1.3% year-over-year.8 We still have a way to go before the Fed considers inflation to be restrictive.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 10/12/20

 

In perhaps one of the most unexpected consequences of the coronavirus pandemic, spending among America’s teens has plummeted to a record low, according to analysts at Piper Sandler.  In its latest semi-annual survey of U.S. teens, they found that teen spending fell to a record low, down 5% from the spring and 9% from last year.  In retrospect, the result should not be a total surprise given that malls (and their retailers), movie theaters, and coffee shops – the main benefactors of teen dollars – have been closed much of the year.  The latest reading eclipses the previous survey low recorded in the fall of 2011.

Source: Piper Sandler

 

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, 10/9/20
  2. Bespoke Investment Group, The Bespoke Report, 10/9/20
  3. Bespoke Investment Group, The Bespoke Report, 10/9/20
  4. Factset Insight, John Butters, 10/12/20
  5. Factset Insight, John Butters, 10/12/20
  6. Saut Strategy, Andrew Adams, Trading Flash, 10/12/2020
  7. P. Morgan Asset Management, Weekly Economic Updates, 10/12/2020
  8. P. Morgan Asset Management, Weekly Economic Updates, 10/12/2020
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