Weekly Investment Newsletter (SITREP) – September 14, 2020

U.S. stock markets have seen remarkable gains coming off the lows in March 2020 and entered September significantly above their respective moving averages. The S&P 500 and NASDAQ indexes have traded 5-10% above their 50-day moving averages since early August.1 Many analysts argued that markets were due for a breather and September is a familiar time for stocks to retreat.

U.S. stocks pulled back further from recent highs in a shortened, but highly volatile, trading week.  The technology-heavy NASDAQ Composite index fared the worst, declining -4.1% and ending the week in correction territory—down 10% or more from the all-time high it reached on September 2nd. Dow Jones Industrial Average shed 467 points finishing the week at 27,665, a decline of -1.7%.  By market cap, the large cap S&P 500 retreated -2.5%, while the mid cap S&P 400 index and small cap Russell 2000 indexes declined -2.3% and -2.5%, respectively.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 9/14/20

The selling was indiscriminate last week as all major sectors saw losses except Basic Materials. Losses were significantly greater in communication services, technology, and energy. Traditionally defensive sectors fared better as utilities, health care, and staples were down the least. Large growth companies saw the declines of 1-2% more than other asset styles. Despite the selloff, large growth companies continue to be the dominant leader in returns for 2020. To add to an already strange year, all the value styles remain negative for the year.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 9/14/20

There was little change in our market indicators for the week despite heavy selling in the markets. The long-term indicator is positive falling from a value of 74 to 69. Recall that the long-term indicator must close below 45 on the week before we deem it necessary to adjust risk in a portfolio. The short-term indicator remains negative after changing on Thursday, September 3rd. This indicator helps us to navigate volatility in the markets when putting new money to work in stocks. Stock market seasonality (read: historical weakness in September/October) already had us in a cautious mode before the short-term indicator shifted. Our client portfolios reflected the concern by maintaining below-average risk levels.

Stocks in the NASDAQ 100 and the S&P 500 Indexes retreated from recently overvalued territory. Both indexes have spent extended periods above their 50-day moving averages giving credit to the expansive market recovery starting in late March. The S&P 500 Index posted a decline of more than 6% since the last all-time high as the index closes near the 50-day average. The NASDAQ 100 printed an impressive 105 days above the 50-day moving average before finally falling below on Friday.2 Both indexes remain broadly in expansion territory despite the heavy selling over the past week.

Source: Bespoke Investment Group, The Bespoke Report, 9/11/20

Since markets are between earnings reporting seasons, this is a good opportunity to check in on the U.S. economic recovery. Economic growth continues to rebound quickly across most areas of the country. Second quarter GDP growth reported record declines of more than 30% reflecting the massive impact of the economic shutdown. However, the economic rebound appears robust as the Atlanta Fed’s GDPNow model estimates real GDP growth of better than 30% for the third quarter of 2020.3 The “Pandemic Recession” may go down as one of the most severe, but short-lived economic declines in U.S. history.

Source: Federal Reserve Bank of Atlanta, www.frbatlanta.org, GDPNow Forecast, 9/10/20

In other economic news, we discussed the search for higher inflation in last week’s SITREP. Many investors are “expecting” higher inflation due to the significant increase in monetary stimulus (Fed money printing). However, we note the gap between expectations and reality using the chart below from the Federal Reserve Bank of St. Louis’ report of the University of Michigan Inflation Expectations survey. While investors are expecting a 3% increase in inflation according to the July survey, actual CPI was reported to be up only 1.7% year-over-year.4 Dr. David Kelly of J.P. Morgan Asset Management recounts that lower energy prices and slack in the U.S. economy have kept actual inflation below expectations.5

Source: The St. Louis Fed FRED Economic Data, 8/28/20

Back to the stock market, we are often asked why technology stocks have responded so differently to the economic recession. The obvious answer is to realize that the economic shutdown did not close most technology companies and their revenues continued to increase during the second quarter. In fact, J.P. Morgan Asset Management reminds us that while earnings growth for the S&P 500 Index was down 27% in the second quarter, the technology sector actually saw earnings rise by 0.5% on a year-over-year basis.6  Those earnings have led to record high “free cash flow” margins, meaning that technology companies have high levels of cash on their balance sheets due to expanding sales during the pandemic. Investors like that idea and continue to bid price multiples (P/E ratios) to higher levels for technology stocks compared to most other sectors.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 9/14/20

Interest rates showed little change last week as investors showed strong fund flows into bond funds. While we saw some fluctuation in rates during July, the recent Fed announcement that higher levels of inflation will be tolerated as part of a new Fed policy to restore unemployment levels to historical norms.7 Investors understood that announcement to mean that interest rates could rise over the coming year as inflation returns to the economy. It now appears the Fed will be acting alone to restore the economy since lawmakers were unable to pass any additional fiscal stimulus measures before the election season heats up.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 9/14/20

What would have been labeled as a “conspiracy theory” just a few short years ago is now a generally accepted fact, a recent study by UBS shows.  A survey by the firm showed that when it comes to belief in what drives financial markets, respondents overwhelmingly believe that nothing matters more than the Fed.  UBS strategists led by Bhanu Baweja stated that in the present market environment, “There was overwhelming consensus that monetary and fiscal stimulus was the most important driver for markets.”  Nothing else was even close. Coronavirus ranked fourth.


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


  1. Bespoke Investment Group, The Bespoke Report, 9/11/20
  2. Bespoke Investment Group, The Bespoke Report, 9/11/20
  3. Federal Reserve Bank of Atlanta, frbatlanta.org, GDPNow Forecast, 9/10/20
  4. The St. Louis Fed FRED Economic Data, 8/28/20
  5. P. Morgan Asset Management, Weekly Market Recap, 9/14/20
  6. P. Morgan Asset Management, Weekly Market Recap, 9/14/20
  7. P. Morgan Asset Management, Weekly Market Recap, 9/14/20