Weekly Investment Newsletter (SITREP) – October 5, 2020

The large cap benchmarks managed to break a string of four consecutive weekly losses and moved higher, although gains were more robust in small and mid-caps.  Most sectors within the S&P 500 index recorded modest positive returns, except for energy stocks, which continued their declines.  For the week, the Dow Jones Industrial Average added 509 points to close at 27,683, a gain of 1.9%.  The technology-heavy NASDAQ Composite rose for a second week, adding 1.5%.  By market cap, the large cap S&P 500 gained 1.5%, while the mid cap S&P 400 and small cap Russell 2000 surged 4.7% and 4.4%, respectively.

 

International markets in the West finished the week predominantly to the upside.  Canada’s TSX rebounded 0.8%, while the United Kingdom’s FTSE added 1%.  On Europe’s mainland, France’s CAC 40 rose 2% along with Germany’s DAX which gained 1.8%.  In Asia, China’s Shanghai Composite finished the week flat, while Japan’s Nikkei declined -0.8%.  As grouped by Morgan Stanley Capital International, developed markets finished the week up 1.3%, while emerging markets added 2.4%.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 10/5/20

 

Market strength returned just in time for the fourth quarter witnessed by last week’s gains in nearly every sector. The “uglies” for 2020 had their week in the limelight last week as small companies, especially small value companies, posted the best results of all asset styles. Unfortunately, the terrific week only serves to make the year “less bad”.

 

Real estate, financials and utilities led the week higher as interest rates spiked on Friday due to concerns over the multiple positive COVID tests for the Presidential family and team. It is hard to ignore the significant outperformance on the year for large growth and the recent resurgence of mid growth companies. The performance gap between the two top sectors, technology and consumer discretionary, and every other sector is quite unique.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 10/5/20

 

Our Engrave Wealth market indicators enter the fourth quarter in the green! The short-term indicator returned to positive status in the final days of September as we saw a small number of Russell 3000 sectors return to favorable demand standards. Despite the weakness in September, the intermediate indicator continues to reflect an uptrend in stocks for the quarter. 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).

The S&P 500 Index broke its recent downtrend last week flirting multiple times with the 50-day moving average (DMA). Technical analysts note the current struggles of the index to move beyond the 50-DMA and close higher than the February highs. The recent sideways movement after obtaining new highs in August is often a sign that the market is building strength to move higher in coming months.1

 

Recent surveys indicate that investors are cautious about investing in stocks – Bespoke Investment Group’s Market Intelligence survey interviews individual investors about their attitude towards the stock market. After extremely weak readings in April, slightly more than 1/3 of all investors surveyed regard their position as neutral on stocks with 43% responding as either “positive” or “very positive” about the stock market.2

Source: Bespoke Investment Group, The Bespoke Report, 10/2/20

 

Neutral is a fair word to describe the primary index right now as the September market correction has brought stock prices down from extremely overbought conditions. Market conditions are frequently measured by the number of standard deviations above or below the 50-DMA. When stock prices are more than two standard deviations above the 50-DMA, the market is considered extremely overbought.

 

This year has seen a bit of everything as stocks touched extremely overbought near the end of 2019, dropped to extremely oversold conditions in February and March of this year, and shot back to extremely overbought conditions in May. Today’s neutral position shows just over 20% of stocks are considered overbought while roughly 21% are considered oversold.3 There remains only one sector in overbought territory – utilities!

Source: Bespoke Investment Group, The Bespoke Morning Lineup, 10/5/20

 

With the close of the third quarter, all eyes now turn to earnings season and the anticipation for a rebound in corporate earnings. Recall that a record number of companies delivered better-than-expected earnings results in the second quarter. However, that meant most companies did not lose as much as analysts had expected. Annualized earnings results for the broader market were down 35% year-over-year and stock prices rallied on the “better” results.4

 

We mentioned last week that only a fraction of companies in the S&P 500 were providing forward guidance to analysts about what to expect for third quarter earnings. That has not stopped analysts from presenting a very rosy picture about an earnings recovery. In fact, John Butters at Factset Insight reports that analysts have forecast a 4.1% quarterly increase in total earnings for the S&P 500.5 While analysts typically lower forecasts during a quarter, the third quarter reports appear quite favorable. Now we must hope that companies can meet the high expectations!

Source: Factset Insight, John Butters, 10/2/20

 

Readers of our investment outlook may wonder if we have abandoned all hope for European stocks – it has been a few years since we have owned stocks from that region. We continue to see challenges for European equities. The recovery in U.S. stocks from March lows has been remarkable compared to their European counterparts. The overall Stoxx 600 Index is down 2.6% during the last quarter and reflects significant challenges for energy and financial companies.6 The Stoxx 600 dipped into extreme oversold territory last week yet trades at higher valuations due to extremely depressed earnings.

Source: Bespoke Investment Group, The Bespoke Report, 10/2/20

 

Interest rates crept higher at the end of last week after the announcement that the President tested positive for COVID-19. The 10-year U.S. Treasury bond closed at 0.70% after spending most of September in a narrow range of 0.60% to 0.65%.  We recently described a few reasons for rates to move higher in 2021, we had not considered that scenario as a possible reason for rates to move higher.

 

Regardless, the pressure on interest rates will most likely come from the Federal Reserve’s comments on future economic growth and the need for additional stimulus. While many expect that inflation should rise due to the amount of economic stimulus, the actual results appear more subdued. Recent inflation measures (PCE) were reported at 1.4% year over year according to Dr. David Kelly at J.P. Morgan Asset Management.7

Source: J.P. Morgan Asset Management, Weekly Market Recap, 10/5/20

 

As portfolio rebalancing in September ended, analysts described the NASDAQ’s performance as a “perfect storm” and “a ‘Nightmare on Elm Street’ month”.  The NASDAQ, which gets about 40% of its value from just a handful of technology stocks, lost more than 5% in September.  Apple, which had managed to weather the Covid-19 pandemic relatively unscathed, closed lower by 10.25% from the closing price on Aug. 31. Prudential Financial chief market strategist Quincy Krosby stated, “There were many elements in the market this September that aligned themselves to basically go from an overbought situation for the mega cap tech names to now become oversold.”  A graphic summary of the September carnage in many of the leading mega-tech stocks are shown below. (chart: CNBC.com)

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. Saut Strategy, Andrew Adams, Trading Flash, 10/5/2020
  2. Bespoke Investment Group, The Bespoke Report, 10/2/20
  3. Bespoke Investment Group, The Morning Lineup, 10/5/2020
  4. Factset Insight, John Butters, 10/2/20
  5. Factset Insight, John Butters, 10/2/20
  6. Bespoke Investment Group, The Bespoke Report, 9/25/20
  7. P. Morgan Asset Management, Weekly Economic Updates, 10/5/2020
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