Weekly Snapshot June 8th, 2020
Market Review: Week Ending 6/8/2020
Equities continued their relentless run off the March lows as the S&P 500 Index gained 4.9% last week closing at 3193, only 0.3% below year-end levels.2 Previously led by only a few large-cap Technology stocks and others deemed to be “stay-at-home” winners, market breadth has expanded in recent weeks with a rotation into the companies most negatively impacted by the lockdown, such as energy, travel, banking, and retail stocks, which all significantly rallied last week. Within the S&P 500, the Energy sector (+15.6%) led the market last week, followed by Financials (+12.3%) and Industrials (+10.4%), while Healthcare (-0.2%) and Consumer Staples (+2.3%) appeared to be sources of funds for traders to move into more cyclical stocks.1 Investors were rewarded for their cyclical bets when Friday’s Nonfarm Payroll report showed a 2.5m increase in jobs in May, when an 8m decrease was expected.1 While there are some quirks in the data relating to PPP (those not currently working but paid from PPP loans were NOT counted as unemployed), the 13.3%1 unemployment rate was viewed as a sign of success when 20% was anticipated, as investors remain singularly focused on the success of the re-opening. While many argue the stock market has become detached from the economy and to society at large as the country continues to protest the death of George Floyd and also battles the coronavirus where US deaths now total nearly 110k, equities continue to benefit from the rising tide of liquidity and stimulus provided by the Federal Reserve and Treasury.1 In addition to the outperformance of cyclical stocks, other assets have confirmed the cyclical bottom that was likely made this spring, as the 10-year Treasury Bond rose 25bps this week to close at a still low 0.89%.1 Small-cap stocks, punished the most during the downturn and long of-of-favor versus the larger, market share taking large-caps, have also surged recently with the Russell 2000 Small-Cap Index gaining 8.1% last week alone.1 Through the close Friday, year to date results for the major indices are as follows: S&P 500 -0.3%, Russell 2000 -9.1%, MSCI EAFE –8.2% and Bloomberg Barclays Aggregate Bond 5%.2
What We’re Watching in the Week Ahead
- Social Unrest – Market participants will be closely following developments in China/Hong Kong and throughout the United States as hotspots have developed in both regions. The US is fighting a global pandemic, record-high unemployment, and continued health care concerns. Adding in the sometimes-violent demonstrations over the death of George Floyd in over 35 cities throughout the country adds another layer of complexity to the economic landscape, only months before the Presidential election.
- Valuation – Stocks typically sell at a discount to normal valuation levels during uncertain times. This time, we believe the uncertainty of where earnings will bottom during a once-in a-lifetime pandemic, has contributed to the rally in stocks. Rather than debate whether stocks are already discounting the improvements expected from an economy that is re-opening, without company guidance or any history of outcomes during a pandemic, valuation has effectively been eliminated from consideration. We do know that 2019 S&P 500 EPS were $165. What we do not know is what level the economy (and earnings) will recover to: 80% of the previous level? 90%? 100%? And when? It will take many months to answer the question about the level of earnings likely in 2021 (the Congressional Budget Office revised its 10-year economic forecast, projecting that the U.S. economy would require the entire decade to make up for output lost in the pandemic). Until then, investors have largely eliminated high multiples as a reason for stocks to pause. We have been skeptical that stocks could rally beyond 3000 on the S&P 500 as we’ve been assuming $150 for “normalized EPS,” and willing to assign a 20x PE multiple during this time of extraordinarily low interest rates. Without considering the question of valuation, stocks have rallied beyond that level without pause.
- Economic Reports – This week we will be focusing on NFIB Small Business Optimism Index, commentary coming from the Federal Reserve’s meeting Tuesday and Wednesday, Initial Jobless claims and the University of Michigan Consumer Sentiment initial read.
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® – Chief Compliance Officer
1-Morningstar Direct 6/7/20
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.