Hello all – we hope you had a pleasant August.
It was a great month for the markets. In fact, it was the best August since the 1980’s. The Dow rose 7.6% for its best August since 1984. The S&P gained 7.0% for its best August since 1986. The Nasdaq, which has a higher concentration of tech companies, had its best August since 2000 with a 9.6% gain. All closed the month at or near record highs.
It was a great month for the markets. In fact, it was the best August since the 1980’s. The Dow rose 7.6% for its best August since 1984. The S&P gained 7.0% for its best August since 1986. The Nasdaq, which has a higher concentration of tech companies, had its best August since 2000 with a 9.6% gain. All closed the month at or near record highs.
Another remarkable stat is that the S&P 500 was lower only 5 days this month. That means stocks were higher for 76% of August. That’s pretty rare.
Continuing with the 'remarkable' theme, stocks have now fully recovered from the drop that began in late February. That’s the fastest recovery ever from a drop that big.
Its hard to believe the market can be doing so well when things are still pretty bad for a lot of companies. However, breaking down the market into sectors shows us that the market is not completely irrationally.
Some companies and sectors have been hit by the shutdowns and are doing poorly, as expected. On the other hand, these conditions are great for other sectors - technology in particular. This has led the overall market to record highs.
Some companies and sectors have been hit by the shutdowns and are doing poorly, as expected. On the other hand, these conditions are great for other sectors - technology in particular. This has led the overall market to record highs.
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It’s a similar story in the corporate world.
Many companies are doing poorly and bankruptcies are rising, but big companies are able to find ways to adapt to these conditions.
Online businesses like Amazon are clear beneficiaries. But other names like WalMart, Target, and Lowe’s were able to boost their e-commerce to reach record sales.
Here’s a look at the increase in sales at WalMart, which doubled their online sales over the past year:
Many companies are doing poorly and bankruptcies are rising, but big companies are able to find ways to adapt to these conditions.
Online businesses like Amazon are clear beneficiaries. But other names like WalMart, Target, and Lowe’s were able to boost their e-commerce to reach record sales.
Here’s a look at the increase in sales at WalMart, which doubled their online sales over the past year:
Then again, these were some of the few businesses that were allowed to remain open. With many smaller businesses required to close their doors - and many still closed today - the big names are able to reap the benefits.
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Overall corporate earnings have come in far above expectations, too.
Well, first we’ll point out that earnings are down 37%, which is a terrible number. However, this is much higher than analysts estimated.
According to Factset, 86% of companies either beat or met expectations, which is the best quarter since they began tracking this data in 2008. Additionally, companies beat the expected number by 23%, which is also a record by a wide margin. The market moves on expectations and this has been part of the move to record highs.
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Overall corporate earnings have come in far above expectations, too.
Well, first we’ll point out that earnings are down 37%, which is a terrible number. However, this is much higher than analysts estimated.
According to Factset, 86% of companies either beat or met expectations, which is the best quarter since they began tracking this data in 2008. Additionally, companies beat the expected number by 23%, which is also a record by a wide margin. The market moves on expectations and this has been part of the move to record highs.
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Economic data has also caught economists flat-footed, coming in well better than their predictions.
Citigroup has an index we’ve mentioned here often called the Economic Surprise Index, which measures economic data in relation to its forecast. If economic data comes in better than forecasted, the index rises. As you can see in the chart below, it’s at a level that is head-and-shoulders above anything seen in the past 20 years.
Citigroup has an index we’ve mentioned here often called the Economic Surprise Index, which measures economic data in relation to its forecast. If economic data comes in better than forecasted, the index rises. As you can see in the chart below, it’s at a level that is head-and-shoulders above anything seen in the past 20 years.
Economic data has been decent overall. Weekly unemployment continues to improve:
The service and manufacturing sectors are also getting stronger:
Also, people are spending more, which has boosted retail sales and durable goods:
However, people might not be feeling too great about the economy as sentiment numbers have turned lower. Here’s a look at small business optimism:
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The Fed was also in the news this month. We won’t spend much time on this, but they announced a shift in their official policy to accept more inflation. It’s something they’ve openly discussed before, but appear to have officially adopted.
We find this policy very troubling and strongly believe it will cause significant problems down the road. In the short term, however, the markets seem to like it and have risen on the news.
We find this policy very troubling and strongly believe it will cause significant problems down the road. In the short term, however, the markets seem to like it and have risen on the news.
It is having an effect on the strength of the dollar, which continues to weaken.
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Lastly, the level of Coronavirus cases continues to decline, which has also helped markets this month. We haven’t heard this mentioned in the press, however. Instead, we hear about the cumulative total of cases or deaths hitting some “grim milestone,” but the Covid picture really is improving.
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Where does the market go from here?
The market is very expensive. Nearly all the indicators we follow are at overbought levels.
Other fundamental metrics are high, as well. The P/E ratio - which simply measures the price of a stock to its earnings - is at its highest level since 2002, signaling the market is very expensive. The P/E ratio based on earnings estimates for the next year (the forward P/E) is at its highest level since 2000.
This doesn’t mean stocks can’t keep going higher, but we think the odds of a decline are high and wouldn’t put new money in at this time. It’s very cheap to hedge a portfolio right now and adding some downside protection may be wise here.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
The market is very expensive. Nearly all the indicators we follow are at overbought levels.
Other fundamental metrics are high, as well. The P/E ratio - which simply measures the price of a stock to its earnings - is at its highest level since 2002, signaling the market is very expensive. The P/E ratio based on earnings estimates for the next year (the forward P/E) is at its highest level since 2000.
This doesn’t mean stocks can’t keep going higher, but we think the odds of a decline are high and wouldn’t put new money in at this time. It’s very cheap to hedge a portfolio right now and adding some downside protection may be wise here.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
