Weekly Snapshot August 31, 2020
Market Review: Week Ending 8/28/2020
US stocks continued to “melt up” last week as virtually all segments (reopening, stay-at-home, cyclicals and technology) rallied. The S&P 500 continues to post the best summer returns since the summer of 1986.1 The Index rose 3.3% last week, closing at 3508 and bond yields drifted higher, with the 10-year Treasury sitting at 0.73% at the week’s end.1 Fed Chairman Powell’s Jackson Hole speech solidified the market’s view of “lower for longer” bond yields with their reduced emphasis on inflation targeting and loose monetary policies, altering a decades old Fed policy of preemptive attempts to thwart inflation. In a world for equities of TINA – There Is No Alternative – investors continue to view all reports through a rose-colored lens. Q2 earnings was a good example, where rather than focus on the 37% decline in year/year EPS for S&P 500 companies, the worst quarterly comparison since Factset began tracking earnings in 2000, Q2 was seen as a catalyst for stocks as a record 84% of companies surpassed the lowered estimates by a record 23% on average.1 This isn’t entirely surprising as the large decline in earnings were already discounted by investors and was the cause of the 35% decline in stocks in the Feb/March period. Despite virus hot spots commonly popping up on college campuses, it seems that not even the outcome of the back-to-school season is being questioned. Investors seem satisfied that the recent trend of new cases is trending down, to the 50k/day level from over 70k/day earlier in the summer, despite the fact that at 50k, it is still over twice as high as the level seen before the May/June economy’s reopening.1 This is not to say that there isn’t solid evidence of improvement, as in recent reports on housing, automobile production, consumer net worth, retail sales, and others, we are seeing real signs of an improving economy, so perhaps “Main Street” isn’t as detached from “Wall Street” as is commonly heard. Finally, the FDA’s emergency-use approval of Abbott Labs rapid-response, self-administered $5 COVID-19 test is a piece of tangible evidence the testing component of the crisis may be improving, as we await news of numerous vaccine trials, including one by Pfizer which enters its phase 2 status in Europe this week. This follows the release of positive news on Moderna’s Phase 3 trial that led to a 6% rise in those shares on the day of the report. Through the close Friday, year to date results for the major indices are as follows: S&P 500 10%, Russell 2000 -4.6%, MSCI EAFE –4.6% and Bloomberg Barclays Aggregate Bond 6.6%.2
What We’re Watching in the Week Ahead
President Trump’s executive order barring U.S. citizens from transactions with Chinese-owned TikTok, a popular social media app in the U.S. has led to speculation of its purchase by the likes of Microsoft, Walmart and others. The order takes effect in less than 30 days. This is the latest in the escalating tensions with China that at one stage dominated the attention of investors worried about trade disruptions with the world’s second largest economy. With nearly a quarter of the S&P 500 comprised of 5 US tech giants that all depend on China to varying degrees for continued growth, this “Tech Cold War” with China bears watching for possible retaliation from China as any impact to these important market leaders could be damaging to the broader market.
Despite a lapse, investors are still counting on an extension of Federal unemployment insurance as 30m people were receiving benefits that expired on July 31st. A permanent breakdown in talks which leads to a gap in replacing incomes lost to COVID-19 related unemployment could stem the recovery given the impact it would have on consumer confidence and spending, as the massive stimulus efforts are largely credited with sustaining the current level of equities. President Trump has signed four Executive Orders to bypass Congress to provide relief to Americans facing high unemployment and a very uncertain back-to-school period. The Orders involved extending Federal Unemployment benefits ($300), along with measures designed to assist renters, student loan borrowers and workers with a temporary elimination of employee payroll taxes. Depending on states compliance, is still unclear when, or if these benefits will be implemented and if they will be implemented across all states equally.
As always, we appreciate your confidence in our team.
Fundamentum Investment Committee
Chad Roope, CFA® Portfolio Manager
Paul Danes, CFA® – Investment Committee
Trevor Forbes – Investment Committee
Matt Dunn, CFA® – OSJ Supervisor
1-Morningstar Direct 8/31/20
Investment advice offered through Fundamentum LLC a registered investment advisor. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no assurance that the investment objective of any investment strategy will be attained. Investing involves risk including loss of principal. Past performance is no guarantee of future performance. All indices are unmanaged and may not be invested into directly.