October Market Recap

November 2, 2020

Stocks fell for the second month in a row as earnings announcements and election angst were top of mind for most investors in October.

While the focus today is rightly on the imminent US elections, last month began with an eye toward corporate earnings, specifically the latest results from Technology giants responsible for some of the largest gains since March. Strangely enough, four of the five largest companies in the US stock market (Apple, Amazon, Alphabet, and Facebook) all reported quarterly earnings on the same day, October 29. The fifth company (Microsoft) reported just two days earlier.

Those announcements coincided with a spike in volatility. The S&P 500, Dow Jones Industrial Average, and NASDAQ all fell close to 6% in the final week of October, a drop made more violent by heightened anxiety about the looming Presidential election, the potential for a contested result, and which party will control the US Senate.

Utilities (+5%) was one of only two sectors in the S&P 500 to finish positive last month. Communication Services (+0.8%) was the other. Technology was the worst-performing sector, falling more than 5% for the second straight month, though it remains the best-performing sector year-to-date. Energy (-4.4%) and Health Care (-3.7%) were others that underperformed in October.

With roughly two-thirds of the companies in the S&P 500 having reported, 86% have beaten consensus earnings estimates, according to data analytics firm FactSet. If that number (86%) holds, it would mark the highest percentage of companies to beat estimates since FactSet began tracking such data in 2008.

Better earnings and future guidance combined with lower stock prices mean Price-to-Earnings (P/E) ratios have moderated (at least a bit) from exceptionally high levels. As of October 30, the S&P’s 12-month forward P/E stood at 20.6. That’s still well above its 5-year average (17.3), but down from 21.5 at the end of September.

The US economy posted a predictably big number when it was announced our country’s GDP grew 33.1% (annualized) in the third quarter. The GDP gains are relative, of course, coming on the heels of a 31.4% collapse in GDP during the previous three months. Time will tell if a potential third wave in COVID-19 cases and hospitalizations will derail these legitimate economic gains.

Interest rates drifted higher for the first time in months. The benchmark 10-year Treasury bond yielded 0.86% at the end of October, its highest mark since early June. 10-year Treasury yields have not eclipsed 1% since mid-March. Slightly higher rates do little, however, to appease investors searching for a reasonable return on safe assets. Our current economic environment, unfortunately, is one in which risk-free assets pay next to nothing.

One thing October did not bring was a new stimulus deal from Congress. Rumors swirled that a second, smaller legislative package could be in the works, but little materialized in negotiations between Treasury Secretary Steve Mnuchin and House Speaker Nancy Pelosi. Truthfully, the next big stimulus from Washington to help US businesses and families is unlikely to come before February, after the winners from this week’s elections have taken their seats on Capitol Hill.

That reality leaves a larger burden to bear for the Federal Reserve, who meets November 4-5 and stands ready (and definitely willing) to inject more liquidity into the system should financial markets weaken further.

Small-cap equities outperformed in October. The Russell 2000 gained 2%, considerably better than the larger-cap US indices. One month does not yet make a trend, but stronger relative performance from smaller companies is a sign investors may be rotating toward stocks that have risen less from their March lows.

October brought an interesting disparity in International equity returns. Non-US Developing Markets fell 3.6%, mostly in line with US stocks. Emerging Markets meanwhile gained 1.4% thanks to a heavy weighting in China.

Oil prices fell more than 10% last week and ended October near their lowest level since May. West Texas Intermediate Crude traded under $36 per barrel compared to roughly $40 per barrel a month ago.

August Market Recap

September 1, 2020

It’s getting hard to remember what down days feel like in this new stock market reality, much less a down month.

The elevator carrying US equity prices not only kept rising in August, its speed accelerated as well. The S&P 500 recorded its best month since April. The Dow Jones Industrial Average gained nearly as much as in the previous three months combined. And the NASDAQ’s technology-driven performance continues to exceed even the loftiest of expectations.

Nine of the 11 sectors in the S&P moved higher in August, with four of those gaining 8% or more. Technology climbed another 12%, the fifth month in a row Tech has risen at least 5%. Consumer Discretionary (+9.5%), Communication Services (+9.1%), and Industrials (8.6%) also yielded big returns. Energy (-2.7%) and Utilities (-1.0%) fell slightly.

Generally, these monthly recaps focus on major benchmarks rather than specific stocks, but Apple, which has rallied 75% year-to-date, has been one of the unofficial flag-bearers for this summer stock rally and made some significant headlines.

In the first week of August, Apple became the largest-ever single weighting in the S&P 500. At that point, it represented 6.5% of the benchmark index (IBM set the previous record in 1985). By the end of the month, Apple had completed a 4-for-1 stock split and swelled to 7.3% of the S&P.

The S&P moved higher on each of the first six trading days in August before finally recording a down-day on August 11. It had another 7-day winning streak from August 20-28. In total, the S&P was green on 16 of the 21 trading days last month, a .762 batting average. But even that doesn’t tell the whole story. Those five down-days combined added up to less than 2% of losses, a nearly total absence of downside volatility.

Gold also made headlines when it surpassed $2,000 per ounce for the first time on August 4. Gold has risen nearly 30% year-to-date and roughly 15% since we sprinkled some into our Marks Group portfolio allocations earlier this summer.

The historic monetary stimulus spearheaded by the Federal Reserve had led to expectations of higher inflation down the road, which has pumped up gold prices and led to a weakening of the US dollar. As we have written before, you need not be bearish on equities to have a positive outlook on gold.

On August 18, the S&P eclipsed its all-time high set in February, which is truly astonishing when you consider the index experienced a 34% collapse between those two dates. Now, at least in terms of the market, it’s as though the global pandemic never happened.

Federal Reserve Chairman Jerome Powell announced changes to the Fed’s official policy at their annual summit (traditionally held in Jackson Hole, Wyoming). The Fed’s revised inflation target will be one that “averages 2% over time,” but allows for higher inflation following periods when inflation is especially low.

In other words, the Fed will be less likely to apply the brakes in periods of strong economic activity by raising interest rates. The change reinforces beliefs that interest rates will remain exceptionally low for an exceptionally long time, even after unemployment falls considerably.

The Fed revisions led to a rise in US Treasury yields, relatively speaking. 10-year Treasury yields approached 0.75% late in the month, their highest point since June.

US home prices continue to hit new highs. The latest data from Case-Shiller shows that home prices nationally have risen 4.3% from a year earlier and 64% from the Great Recession lows in 2012.

Phoenix (+8.9%) and Seattle (+6.8%) recorded the largest increases in the last 12 months. Minneapolis (+5.5%) was fifth. Much of the gains are being driven by low supply. Inventory at the end of July was down 21% compared to a year earlier, according to the National Association of Realtors.

International equity prices lagged US stocks in August. Non-US Developed Market equities gained 4.7% last month. Emerging Market stocks increased 2.9%. Oil prices rose slightly to $42.61 per barrel, up roughly 6% from a month earlier.

June Market Recap

July 1, 2020

Inequality was everywhere in the first six months of 2020. Or perhaps it’s more accurate to say eyes were opened to the inequality that has saturated our country and the world for generations.

As we try to put the first half of the year into context, that seems a recurring theme. In the early stages of the COVID-19 pandemic, some countries were hit especially hard while others had the benefit of extra time and medical data to prepare. Once the US economy effectively shut down in March to slow the spread of the virus, certain industries (hospitality, travel, restaurants, retail) struggled to survive while others (technology, media, etc.) remained relatively insulated.

Data, meanwhile, showed that low-income Americans were disproportionately affected by the pandemic in terms of job security, likelihood of virus exposure, and healthcare. This undoubtedly contributed to Americans’ response to the death of George Floyd by Minneapolis police and the national protests that followed.

As economic uncertainty gripped financial markets, stocks fell indiscriminately in February and March. In both April and May, all 11 sectors in the S&P 500 climbed higher.

June, however, shined a brighter light on the “haves” and “have-nots” when it comes to individual companies. The three major US equity benchmarks booked gains last month, but a peek under the hood reveals not all cylinders are firing.

Six of the 11 sectors in the S&P 500 were negative, with Utilities (-4.7%) and Health Care (-2.4%) the worst of those. Technology (+7.1%) returned the largest gains, climbing more than 7% for the second month in a row. Consumer Discretionary (+5%) was close behind.

In terms of year-to-date performance, Tech (+15%) and Consumer Discretionary (+7.2%) are the only two sectors with positive returns. Halfway through 2020, four sectors in the S&P 500 have lost more than 10%; Energy (-35.3%), Financials (-23.6%), Industrials (-14.6%), and Utilities (-11.1%).

When it comes to diagnosing recent performance, it’s Big Tech and everything else. The year-to-date spread between the NASDAQ and the Dow is incredible.

The first week of June saw stocks still riding the momentum from previous months.  A shockingly positive jobs report on June 5 showed the US economy added 2.5 million jobs in May. The national unemployment rate, as cited in the report, fell to 13.3%, a surprise big enough to jolt the Dow 830 points higher.

On June 9, the NASDAQ eclipsed 10,000 for the first time, a milestone especially impressive considering it came during a global pandemic and economic recession.

The next day, Fed Chair Jerome Powell committed to keeping interest rates near zero for another two-and-a-half years, though 2022. Powell also said the pace of the Fed’s asset purchases (i.e. bond buying) would accelerate in the months to come.

In his own words: “We’re not even thinking about thinking about raising rates,” Powell said. That’s not a typo. Powell went to great lengths to suggest it will be a long time before the Fed Funds rate moves higher.

Suggestions of favorable policy were outweighed, however, by the Fed’s sobering economic outlook of a 6.5% contraction in GDP this year followed by 3-5% GDP growth in 2021 and 2022. Once the news was digested, stocks sold off aggressively on June 11, which proved to be the market’s worst single-day drop since the March 23 low. The Dow fell nearly 1,900 points (6.9%).

The economic data did show reasons for optimism. The latest retail sales and consumer spending figures showed a sharp rebound from previous months and further fueled hopes for a sharper recovery. All of that, of course, is predicated on the idea that public health conditions improve rather than worsen.

The momentum in equity prices stalled in the second half of June and much of that can be attributed to the reality that, medically speaking, the spread of coronavirus is again accelerating in much of the country.  Infectious disease expert Dr. Anthony Fauci admitted earlier this week, “We are moving in the wrong direction,” in terms of virus containment, and said he would not be surprised if the US eventually reports 100,000 new cases per day later this summer.

The results of the banking sector’s latest stress tests also threw some cold water on stock bulls late in June. In order to ensure our country’s largest financial institutions “maintain enough capital to weather the economic strain brought on by the current recession,” the Fed banned stock buybacks and imposed limitations on the size of stock dividends for the 33 largest US banks.

Oil prices rose 10.7% in June with West Texas Intermediate Crude ending the month at $39.70 per barrel. Rising oil helped Emerging Market equities (+6.6%) outperform last month. Non-US Developed Markets (+3.5%) also fared relatively well, thanks in part to the US dollar weakening.

Ten-year US Treasury bonds yielded 0.65% as of June 30, unchanged from a month earlier. Ten-year yields did climb as high as 0.96% on June 5 before retreating.

April Market Recap

May 1, 2020

The laws of gravity dictate that what goes up must come down. Isaac Newton discovered no such law applicable to financial markets, but history has proven the inverse does indeed apply to equities. When it comes to the major US benchmarks, at least, what goes down will inevitably come back up.

Exceptionally oversold conditions in late March and what seems a never-ending supply of stimulus ignited a historic rebound rally in April. Although the COVID-19 pandemic remains far from over, the S&P 500 (+12.7%) and Dow Jones Industrial Average (+11.1%) notched their largest monthly gains in 33 years. It was the S&P’s third-best month since World War II. The NASDAQ’s 15.5% bounce was its biggest since June 2000.

From the March 23 lows through the end of April, the S&P has risen 33%. In five weeks. It remains uncertain whether this snapback in stock prices is sustainable or instead proves to be a bear market rally. For now, at least, it infused investors and portfolios desperate for gains after the sharp declines in prior months.

All 11 sectors in the S&P 500 moved higher in April with six of those gaining 12% or more. Energy (+29.8%) led the way for a change, though it remains the worst-performing sector so far in 2020. Consumer Discretionary (+20.6%) also generated strong returns. Typically-defensive sectors like Utilities (+3.2%) and Consumer Staples (+6.9%) rose the least.

April gains reached the lofty numbers above despite starting the month with a thud. The Dow fell 974 points on April 1. The next day gave us an almost unbelievable 6.7 million weekly jobless claims. Combined with the prior week, it meant at least 10 million Americans lost their jobs in two weeks, roughly equivalent to the total number of claims filed in the first six-and-a-half months of the 2007-09 recession.

An hour into trading on April 2, the Dow was actually 350 points higher, an indication of just how much bad news was already priced into equity markets. By the end of April, a staggering 30 million Americans had filed unemployment claims according to the US Department of Labor.

The latest medical reports show roughly 1.1 million Americans have been infected with coronavirus and at least 64,000 have died. The number of daily reported deaths nationally seems to have plateaued but not decreased. Shelter-in-place mandates and other lifestyle changes have successfully “flattened the curve,” in other words, but the evidence does not suggest an end to this pandemic is coming anytime soon.

First-quarter GDP numbers were even worse than consensus expectations. The US economy contracted 4.8% from a year earlier. It was the first year-over-year decline in six years and we already know second-quarter GDP will be far worse due to economic shutdown measures that did not take effect until March. Consumer spending, the largest component of GDP, fell 7.6%.

The strong rebound in stock prices despite such ugly economic data suggests a willingness by investors to look beyond what will surely be a deep, but hopefully short-lived, recession this year. The steady stream of massive stimulus announced by Congress and the Federal Reserve has made it easier to take the long-view.

We will avoid the nitty gritty details of various Fed and government programs announced since this epidemic began, but the sheer magnitude of support is tough to overstate. The Congressional Budget Office said in April that the response to COVID-19 could lead our federal budget to quadruple this year.

The Fed and our lawmakers’ willingness to support businesses and families was key to the April rally, but will also bring long-term consequences. Fed Chair Jerome Powell acknowledged as much when he said, “Now is not the time to worry about debt, but use the great fiscal power of the US to avoid deeper damage to the economy.”

Ten-year US Treasury bonds ended April yielding 0.62% (compared to 0.70% a month earlier). Interest rates seem destined to remain near historical lows for the foreseeable future. According to the Fed’s official statement on April 29, it “expects to maintain this target (rate) range until we are confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”

Large-cap stocks have weathered this economic uncertainty better than small-caps, although that gap narrowed somewhat later in April. The Russell 2000 gained 13.7% last month, better than both the Dow and S&P. Technology companies with especially large market capitalizations generally remain the best performers. As a sector, Technology finished April with positive year-to-date returns, compared to a 9.9% year-to-date loss for the S&P 500.

In a sign of how unusual these economic and market conditions truly are, crude oil traded below zero for a few days in April. Specifically, the contracts for May delivery traded with negative prices last month. Due to a combination of high production and evaporating global energy demand, negative prices indicated oil producers were literally willing to pay buyers to take oil off their hands in order to avoid storage costs.

It was the latest once-in-a-lifetime event to happen during this pandemic. It’s probably safe to say there will be more to come.

February Market Recap

March 2, 2020

The stock market can no longer boast a clean bill of health.

As reported cases of Coronavirus spread beyond Chinese borders, so too did concerns about its ability to bring the global economy to a screeching halt.

Those concerns snowballed into panic in the final week of February. The S&P 500 established a new all-time high on February 19. Less than six full trading days later, the S&P had fallen 10%, the fastest correction in history.

When financial markets closed on February 28, the S&P sat roughly 13% below its Feb. 19 high. The Dow Jones Industrial Average sank 14% from its February high through month’s end, giving up more than 4,000 points in the process. That included a 1,191-point plunge (-4.4%) on February 27.

The sudden and sobering reality: This was the worst single week for US equities since October 2008.

All 11 sectors in the S&P fell sharply last month, with the “best-performing” categories still booking losses greater than 6%. Communication Services (-6.3%) and Real Estate (-6.3%) held up better than most. Financials (-11.2%) and Energy (-14.6%) were hit hardest.

The World Health Organization has yet to classify the Coronavirus (COVID-19) outbreak as a “pandemic,” but that distinction matters little to investors, or to American families for that matter. Although the number of reported infections and deaths in the US has yet to accelerate, it’s the uncertainty that fueled such a serious selloff.

At this point, any guess at the true economic impact remains speculative.

Among the questions without quantifiable answers:

• How many US businesses will close at least temporarily?
• How long might those operations be shuttered?
• How significant will the drop in consumer spending (and traveling) be?
• How big will the impact be on US corporate earnings?

While the speed of this latest correction in stock prices is indeed exceptional, a reminder that 10% pullbacks are not at all unusual. Last week’s was the 7th correction of at least 10% since March 2009, and each one proved to be a buying opportunity.

Our view is that a meaningful adjustment in equity prices appears justified, especially considering valuations for the S&P 500 had risen to their highest level in a decade. Let’s not confuse a correction, however, with the end of this 11-year bullish trend in US equities. The threats from Coronavirus no doubt increase the possibility of a US recession, but by no means is that the inevitable outcome.

One factor that will (again) influence how markets behave going forward is Federal Reserve policy. Until late February, it was widely assumed the Fed would stand pat with interest rates in the first half of 2020, but it now appears realistic the Fed could drop rates further as early as March.

Indeed, the hope for a near-term Fed cut helped the Dow rally nearly 1,300 points on the first trading day of March, its largest single-day point gain ever. While the Fed is supposed to be agnostic to short-term market movements, its members will likely be sensitive to “disappointing” markets in this especially volatile environment.

With or without a policy change, interest rates have slipped to their lowest levels in history. Ten-year US Treasury yields fell below 1.3% in February for the first time ever and finished the month yielding 1.13% (compared to 1.92% only two months ago). That is also well below the previous all-times low of 1.34% set in July 2016. Two-year US government bonds yield only 0.90%.

International equities held up better last month than some might have expected. Emerging Market equities, of which China is by far the largest regional weighting, lost 3.8% in February. Non-US Developed Equities dropped 7.8%. The Chinese city of Wuhan, of course, is ground zero for the Coronavirus so it’s encouraging that China’s stock market proved somewhat more resilient as the country continues its efforts to contain the outbreak.

Oil prices continued to sink precipitously last month. West Texas Intermediate Crude finished February at $44.76 per barrel as the economic slowdown in China and other emerging markets has flattened near-term demand. Oil has now fallen roughly 30% from its early January highs.