Client Note July 2020

After a brief pause in June, financial markets continued their climb, trying to get to even on the year.  Of the major indexes, only the tech-heavy NASDAQ has managed to make new all-time highs.  The discrepancy across indexes is significant.

Off its all-time high             year to date price return

The Dow:                              -10% (Feb 2020)                                  -7%

S&P 500                                 -4% (Feb 2020)                                 +1%

Russell 2000 (small cap)    -12%   (Jan 2020)                               -10%

NASDAQ                                  -3% (July 2020)                                 +20%

EAFE (Eur/Afr/Far East)      -15%  (Jan 2018)                                 -8%

 

Inside the NASDAQ, the top “6” holdings are Apple, Microsoft, Amazon, Facebook, Alphabet A shares and Alphabet B shares.  These 5 stocks make up 44% of the index.  What this means is that only a handful of stocks, in one sector, are keeping the overall indexes up.  One can say, “so goes tech, so goes the markets”.    US mega cap growth/tech has been the only game in town.   More recently tech has weakened against the rest of the market.   If tech loses it dominance without another sector or two to take the reins, equity markets will have a bumpy second half 2020.

Portfolios I manage continue to do very well.  Gold is in the news a lot recently.  Over the past 15 months, gold has dramatically outperformed equity markets, and climbed 65% since November 2018.  The last 15% of that has come in the past two weeks.  Trimming and taking profits is on the schedule for August.   The individual stocks I choose from time to time have become a mixed bag.  IRBT and APRN recently reported significant upside earnings surprises, only to be sold off hard.  I am seeing this in several areasIts feeling like a ‘sell the news’ kind of market.  After a 50% climb since the March lows, its not inconceivable that stocks will take a breather.  Perhaps even give back some as we adapt to living with Covid19.     Clients can probably observe the steps I have taken to reduce exposure and take some profits, so that if/when we get a correction, it should not be too painful.

July 30, 2020 has the potential to be a historic day.   GDP for the second quarter 2020, covering March 30 through June 30 will be released.  Current estimates are to see a contraction in US GDP of -30%.  This would be the worst quarter since Dec 1946 and sets up the worst year since then as well.  While this is widely known to people who follow it, I am sure it will be a shock to some, and widely covered in the financial press.   In addition, all the tech stocks mentioned above will report earnings.  They will all be very profitable, but if this is indeed a ‘sell the news’ market, beware.  Microsoft already reported on July 22, beating estimates, and was sold off by 6%, recovering only a part of that decline this past week.

The economy is not coming back as fast as hoped and is already showing signs of levelling off.  Roughly 10% of our economy has disappeared (hospitality/tourism).   As long as the Fed promises, and CONTINUES to inflate the monetary base, financial markets can remain elevated However, if a small correction gets out of hand, the Fed has little influence in the very short term—and not much new to offer.  .  The real economy however will not come back without greater spending from consumers and businesses—either through earned wages, or stimulus, or loans/credit.

 

Adam Waszkowski, CFA