Weekly Snapshot August 03, 2020
Market Review: Week Ending 7/31/2020
Despite a Congressional impasse that halted the $600 weekly Federal unemployment benefit for 30m recipients and the continued surge in Covid-19 cases, the S&P 500 Index rose 1.7% to 3271.1 It did so on back of strong earnings from the large Technology leaders – Apple, Amazon, Google, Facebook – and news of beginning Phase 3 trials from Moderna and Pfizer for their vaccine drugs.1 In what is a remarkable environment of contrasts, it was reported that Real GDP fell 32.9% (annualized) in Q2 in the US, the largest decline since records began being kept in 1947, while a record 84% of S&P 500 companies beat analyst estimates by 21% in this same quarter (another record).1 Nearly 2m new Covid-19 cases were registered in July,1 double the previous highest monthly total, in a second wave that is hitting regions thought to have beaten the spread of the virus. A senior medical professional in the Trump administration called the virus “extraordinarily widespread” over the weekend and suggests that using a mask within the home may be appropriate for vulnerable people.1 Yet markets continue to be fueled by unprecedented monetary stimulus, support for which was reinforced last week from comments from Fed Chairman Powell. With economic output collapsing and stocks staying elevated, US equities reached an all-time high valuation of 2x GDP compared to the previous high of 1.87x in the dot.com bubble era.1 To us, this emphasizes the faith investors are placing on continued economic recovery and a vaccine – or a result that in a world of near-zero interest rates, there are few alternatives to stocks. Gold and many precious metals have surged of late, raising the question of whether investors are beginning to look for hedges against rising inflation (and falling USD) given the liquidity surge, or looking for outlets outside of a narrow group of large-tech stocks to place bets. Through the close Friday, year to date results for the major indices are as follows: S&P 500 2.4%, Russell 2000 -10.6%, MSCI EAFE –9.3% and Bloomberg Barclays Aggregate Bond 7.7%.2
What We’re Watching in the Week Ahead
FEDERAL RESERVE POLICY
It is reported that the Fed will soon announce plans to abandon its strategy of preemptively raising interest rates to head off higher inflation, a practice it has followed for over three decades.1 Instead, Fed officials would take a more relaxed view by allowing for periods where inflation would run above the central bank’s 2% target, to make up for past times when inflation ran below the target. This is despite already record-low levels of interest rates, where Fed policy began lowering the Fed Funds rate this cycle at only 2.4%, compared to 5%, 6%, and nearly 10% the last three prior downturns. Lower-for-longer is the result of chronically sluggish global growth, not just the impact of the pandemic. We will be watching how markets accept this change, fearing that inflation could be harder to control (and anticipate) if/when a sustained economic upturn begins.
Investors were counting on an extension of Federal unemployment insurance as 30m people were receiving benefits that expired on July 31st. Senate Republicans have offered a $1T plan that includes another one-time stimulus check and another (lower) Federal unemployment benefit.1 This has been met with resistance from House Democrats who offered a package that includes the same, $600/weekly Federal unemployment benefit. A long-standing breakdown in talks which leads to more than a temporary gap in replacing incomes lost to Covid-19 related unemployment may be be met with selling, as the massive stimulus efforts are credited with sustaining the current level of the economy and equities.
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 8/3/20
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.