Weekly Investment Newsletter (SITREP) – October 19, 2020

The large-cap benchmarks narrowly managed a third consecutive week of gains, while smaller-cap shares lagged slightly.  The Dow Jones Industrials finished the week up just 19 points to 28,606.  The technology-heavy NASDAQ Composite added 0.8% to close at 11,672.  By market cap, the large cap S&P 500 rose 0.2%, while the mid cap S&P 400 finished flat and the small cap Russell 2000 gave up -0.2%.

 

Almost all international markets finished the week in the red.  Canada’s TSX declined -0.7%, while the United Kingdom’s FTSE 100 gave up -1.6%.  France’s CAC 40 ticked down -0.2%, while Germany’s DAX retreated -1.1%.  In Asia, China’s Shanghai Composite was the only major international market to rise adding 2%.  Japan’s Nikkei declined -0.9%.  As grouped by Morgan Stanley Capital International, developed markets declined ‑1.4%, while emerging markets ended higher by only 0.15%.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 10/19/20

 

In a week that could be described as “going nowhere”, the net result was a market that saw most categories return somewhere between +0.5% and -0.5%. We continue to hear many analysts report they are “cautiously optimistic” about markets going into the U.S. elections.1 Investors appear to be in the same mode as the top performing sectors last week are consistent with those that have done the best for the year. The energy and real estate sector continue to lag as investors brace for earnings disappointments in the coming weeks. Recent outperformance by small companies subsided last week as large companies maintain significant outperformance in 2020.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 10/19/20

 

Our Engrave Wealth market indicators continue to reflect increasing demand for U.S. stocks across all time frames. The short-term indicator rose nominally last week while the long-term indicator remains comfortably in a moderate zone. Our market indicators are designed to help us gauge whether investors are willing to accept the risk of markets. While the markets always involve some level of risk, the indicators help us to know whether we can expect returns that will compensate us for taking the risk. You can learn more about our market indicators by watching our monthly “Portfolio Construction” webinar (link here).

The markets have been showing strong fundamental readings in the first two weeks of October. We are impressed with recent measures of breadth showing many stocks advancing in price while also seeing prices within a reasonable band of recent moving averages. However, there remains a significant difference in returns between the major indexes. The S&P 500 Index is now up slightly better than 9% for the year while the NASDAQ index has soared more than 30%.2

 

Apparently, the weekend news cycle has been positive for stocks in the NASDAQ as Monday returns have been most favorable for the index. The NASDAQ also continues to show the broadest number of stocks participating in the rally and contains several sectors with accelerating earnings growth that perform well when markets are rising.3 Be aware, though, market corrections tend to be exaggerated in the NASDAQ as well.

Source: Bespoke Investment Group, The Bespoke Report, 10/16/20

 

We are entering the second week of earnings season and will see many more companies announcing third quarter earnings results. The prelude to earnings season has seen analysts aggressively raising estimates for most sectors in earnest after predicting massive reductions in earnings estimates for the second quarter. Every sector except real estate saw a big increase in analyst earnings estimates heading into earnings season. Bespoke Investment Group notes that, historically, “when analysts are overly bullish on earnings estimates, some weakness in share prices usually follows as the earnings season progresses”.4

Source: Bespoke Investment Group, The Bespoke Morning Lineup, 10/16/20

 

The first week of earnings results were encouraging as 86% of companies reported earnings better than was expected. While only 10% of S&P 500 companies have released third quarter earnings, the numbers are reflecting the rapid rebound of the U.S. economy. Analysts are expecting earnings for the S&P 500 to decline year-over-year by more than 18% due to the recession, however, most sectors are showing declines less than expected.5 Health care is the only sector that is expecting a modest increase in earnings.

Source: Factset Insight, John Butters, 10/16/20

 

The pandemic has affected all world markets severely but the U.S. and China appear to have weathered the effects the best. The total size of all companies in China recently surpassed $10 trillion marking a new all-time high. The U.S. market continues to represent an increasing share (42%) of the total world market by a wide margin, but the Chinese market has surged to the second largest share (11%) as most European countries remain mired in slow growth.6

 

The European stock index (EURO STOXX 600) had only recently recovered to its multi-decade resistance line before the affects of COVID took market values down. The index is currently 11% below its high in 2000 and reflects the continued struggle for economic growth in the European region. Relative to the S&P 500, the STOXX 600 has shrunk in relative value to some of the lowest readings ever recorded.7 Cheap valuations do not bring encouragement for a pending recovery as most European countries continue to suffer from negative interest rates.

Source: Bespoke Investment Group, The Bespoke Report, 10/16/20

 

U.S. interest rates continued their recent climb as the 10-year U.S. Treasury Bond surged to 0.76%. The difference between 2-year rates and 30-year rates (known as the spread) has reached its highest level since 2017 thanks to Fed policy to keep short-term rates low while the markets anticipate economic growth over the next year.8 Recall that long-term interest rates are highly correlated the U.S. GDP growth – as the economy grows, long-term interest rates should rise, all else held equal. Long-term U.S. Treasury Bonds now trade below their 200-day moving average as the recent rise in rates reflect losses in value for the bonds.9

Source: J.P. Morgan Asset Management, Weekly Market Recap, 10/19/20

 

If your dream is to own the biggest house you can possibly afford, moving to West Virginia or Mississippi might make sense for you.  Data analytics site HowMuch.net measured the average cost per square foot of homes in each state across the country.  They found that Mississippi, West Virginia, and Arkansas led the way with the least expensive homes per square foot, while Washington D.C., Hawaii, and California were home to the most expensive.  As shown in the chart below, from HowMuch.net, $500,000 will buy a home in West Virginia that has more than 3 times the square footage of a $500,000 home in California.

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, 10/16/20
  2. Bespoke Investment Group, The Bespoke Report, 10/16/20
  3. Bespoke Investment Group, The Bespoke Report, 10/16/20
  4. Bespoke Investment Group, The Bespoke Report, 10/16/20
  5. Factset Insight, John Butters, 10/16/20
  6. Bespoke Investment Group, The Bespoke Report, 10/16/20
  7. Bespoke Investment Group, The Bespoke Report, 10/16/20
  8. Bespoke Investment Group, The Bespoke Report, 10/16/20
  9. Bespoke Investment Group, The Bespoke Report, 10/16/20
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