Weekly Investment Newsletter (SITREP) – September 7, 2020

While the last two days of the last week saw significant downturns in the markets, the declines hardly register on the annual returns for the S&P 500 and NASDAQ indexes. Both indexes have seen tremendous outperformance over the last month (very unusual for August) and were extended beyond normal ranges. For now, it appears the market selloff on Thursday and Friday are classical mean reversion where the most overbought areas of the market have fallen the hardest.

 

U.S. stocks finished the week lower as investors suddenly took profits on Thursday and Friday after setting new all-time highs on Wednesday on several benchmark indexes.  The technology-heavy NASDAQ Composite index suffered the deepest decline, giving up more than 3% on the week, but remains comfortably up year-to-date.  The Dow Jones Industrial Average tumbled by more than 500 points to finish the week at 28,133, a decline of -1.8%.  The NASDAQ capped five consecutive weeks of gains with a -3.3% decline.  By market cap, the large cap S&P 500 retreated ‑2.3%, while the mid cap S&P 400 and small cap Russell 2000 declined -2.5% and -2.7%, respectively.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 9/7/20

 

The communication services, technology and consumer discretionary sectors took the brunt of the damage last week. However, those sectors were trading so high above their 50-day moving average that they remain in solid shape from a technical perspective. The only sectors trading below their 50-day moving average include health care, energy, and utilities. The materials sector remains in overbought territory standing at least one standard deviation above the 50-day average.1 Stocks with the strongest performance since the March 23rd low took the biggest hits last week.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 9/7/20

 

The market selloff on Thursday saw multiple S&P 500 sectors stumble sending our short-term indicator into a negative status. The market indicators help us to measure risk levels across the market in various time segments. Recall that the short-term indicator is most useful in gauging potential changes in investor sentiment over the next few weeks. A negative status encourages our investment committee to be cautious when deploying new cash into the market. The remaining market indicators are favorable for the time being but will be watched closely for additional changes.

It is impressive to know that the market selloff last week barely brought the broader index to the high end of normal ranges. The S&P 500 Index had been trading in overbought territory for the last six weeks according to measures against the 50-day moving average; the index slipped just below that level on Friday. The S&P 500 continues at 9% above its 200-day moving average, which is three times the normal level.2 If the market continued to move lower, technical analysts would not be overly concerned.

 

The NASDAQ 100 Index has been the hottest index since the recovery began at the end of March. Even after a decline of 8% last week, the index is 22% above its 200-day moving average. Bespoke Investment Group notes even if the NASDAQ were to experience a decline of 20% (a bear market by definition) in the coming weeks, the index would remain above its 200-day moving average.3

Source: Bespoke Investment Group, The Bespoke Report, 9/4/20

 

The S&P 500 Index experienced a 35% gain between April and August marking the best 5-month performance for the index since 1938.4 The index has cleared every technical hurdle since the recession began to make new all-time highs over the last two weeks. The only challenge after such a quick run is that it leaves very few technical resistance points if the market falls. The recent decline appears more traditional as lower valued companies have performed better than most. Analysts have been quick to note the underperforming areas of the market held up better than the recent high-flyers. History shows that a market experiencing a significant move higher over five months is often met with continued gains over the following five months.5

Source: Saut Strategy, Andrew Adams, Trading Flash, 9/4/20

 

September has not been kind to stock market investors of the past – it is the worst month of the year over the last 100 years.6 The first two days of the month were encouraging as gains continued to roll in, however the selloff Thursday and Friday lived up to September standards. Uncertainties remain over the economic recovery, unemployment, and the election in November. While July and August rallied on better-than-expected corporate earnings news, September will not have much to focus on other than news headlines – and those leave little comfort for hope!

Source: Bespoke Investment Group, The Bespoke Report, 9/4/20

 

Investors are on the hunt for signs of future inflation. Higher inflation is often expected when the Fed has been adding stimulus to the market (read: increasing the money supply). However, Fed activity has struggled to keep pace with the declining money supply from the recession and has not added significantly to inflation as anticipated. To be sure, the Consumer Price Index recently saw a modest increase after several positive economic reports. Analysts recently noted strong readings in the ISM economic surveys reflecting higher commodity prices. Survey respondents also noted multiple commodities in short supply due to the COVID pandemic, which should contribute to higher prices in months to come.7 Higher inflation will often signal the potential for higher interest rates.

Source: Bespoke Investment Group, The Bespoke Report, 9/4/20

 

U.S. interest rates closed modestly lower than the prior week but remain at the upper end of their recent ranges. Recall that the 10-year U.S. Treasury started 2020 just under 2% but quickly fell to a low rate of 0.38% in the trench of the economic shutdown.8 The increase in interest rates since March can be attributed to rebounding economic growth and the ability of the Treasury to continue issuing new bonds that are appealing to investors. Mortgage rates continue just above 3% as Americans continue to take advantage of mortgage refinancing and new home purchases at generational low rates.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 9/7/20

 

Ryan Detrick, chief market strategist at LPL Financial, published a study this week in which he said a simple equity-market chart has been the best predictor of U.S. presidential elections since 1984, proving 100% accurate—and is 87% accurate since 1928.The LPL analyst says that a chart of the S&P 500’s performance in the three-month period ahead of Election Day, which is Nov. 3 this year, has proven accurate over the past nearly four decades.  If the S&P 500 declines during this 3-month stretch, the incumbent party loses, but if the S&P 500 rises during this 3-month period, the incumbent party wins.

 

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, 8/28/20
  2. Bespoke Investment Group, The Bespoke Report, 8/28/20
  3. Factset Insight, John Butters, “Record Performance vs EPS Estimates by S&P 500 Companies in Q2”, 8/28/20
  4. Bespoke Investment Group, The Bespoke Report, 8/28/20
  5. Bespoke Investment Group, The Bespoke Report, 8/28/20
  6. Bespoke Investment Group, The Bespoke Report, 8/28/20
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