Commentary for November, 2020

Hello all – we hope you had a great November.  

Stocks had a great month, too.  The Dow saw its biggest monthly gain since 1987 with a rise of 12%.  The S&P 500 and Nasdaq did well, too, but only had their best month since April.  The S&P rose 11% while the Nasdaq was up 12%. 

Here’s a look at the monthly performance of the Dow since 1987:

 

We can’t forget the smaller stocks.  The Russell 2000 index is made up of small stocks and it had its best month ever with an 18% gain. 

 

The gains in the markets look very healthy, too.  Sometimes an index might be up because a few names had a very strong month and the rest of the index was mediocre.  

However, of the 500 stocks in the S&P 500, 464 are up this month.  That’s pretty rare and signals a healthy, broad-based rally.

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Two main topics were responsible for much of the gains this month: The Presidential election and Coronavirus.  

First, the election.  It’s hard to believe the election was only a few weeks ago as it seems like an eternity.  

The markets have been pleased with the result, which as it stands now, shows a Democrat in the White House and Republicans holding the Senate.  This creates gridlock and prevents more radical elements of the Biden agenda from being implemented, particularly when it comes to business issues like taxes.

The market was also reassured by the personnel choices Biden has made to fill positions in the administration.  For example, Janet Yellen as Treasury Secretary is someone we’re all familiar with and not controversial, like an Elizabeth Warren or Bernie Sanders would be in that position.  

While the market is happy that these nominees are not from the extreme left, they are all solidly left.  There’s also a lack of private experience in this group.  Virtually every nominee comes from Washington or academia.  A lack of understanding of business - or even outright hostility of it - could lead us back to the regulatory overreach we saw under the Obama administration.  

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As for the Coronavirus, this month was very bipolar for virus news.  

On one hand, the amount of new cases has risen sharply, although doubling the amount of testing in just the last two months may have something to do with this.

New lockdowns were issued in many states and cities and we’re seeing this have a negative impact on the economy.  Unemployment is rising and many businesses are closing their doors for good.  

On the other hand, several new vaccines were announced this month.  Every announcement saw stocks soar on the news.

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As for other news this month, nearly all the companies in the S&P 500 have reported their earnings for the third quarter and the results were far better than expected.

Analysts were originally expecting profits to fall over 20%, but the results stand at just a 6% loss.  While a loss is not something to celebrate, it shows that the conditions out there are not nearly as bad as believed.  

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Economic data this month was mixed.  As we mentioned earlier, shutdowns are causing businesses to close and people to lose their jobs.  More people are now filing for unemployment.

 

Other economic data shows the economy is still strong and growing.

The service and manufacturing sectors are both expanding (a number over 50 means expansion):

 

Retail sales are growing - though at a very low rate:

 

Durable goods, which are items with a longer life, look a little more promising:

 

People aren’t feeling as good about the economy.  Consumer sentiment ticked lower last month and remains a long way from where it was before the virus.

 

Sentiment at small businesses has rocketed back from the virus lows, but stayed flat over the past month.

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 Where does the market go from here?  

Stocks appear to be on the high side in the short term, based on the indicators we follow.  That said, we aren’t too concerned with a large pullback here.  While we think the odds of a rise are too low to put a large amount of new money in at this point, the market gains have been healthy and we wouldn’t be surprised to see markets grind higher.  After all, December has historically been one of the best months for the indexes.  



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.

Commentary for October 2020

Hello all – we hope you had a nice October.

It was a tough month for the markets as they posted their worst returns since March when the Coronavirus began.  The Dow lost 4.6%, the S&P fell 2.7%, and the Nasdaq, which has a higher concentration of tech companies, was off 2.3%. 

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 The main focus this month was the election.  

Some commentators attributed the movement of the markets this month to investors preparing for the various political outcomes.  There may, in fact, have been some money taken off the table to avoid volatility around the election, but positioning portfolios at this time is foolish since it’s just too close to call.  

A couple months ago we mentioned how the stock market was a great indicator of who would win the Presidency.  With a 90% accuracy, if the market is up in the three months before an election, the incumbent wins.  If it is lower, the incumbent loses.

As you can see in the chart below, there’s still a couple days left but it is a very close call.

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The rising level of Coronavirus cases also had an impact on the market.  Cases turned sharply higher and reached record daily levels.

 

 

However, its not as serious as it appears.  The level of deaths remains very low despite the higher level of cases.

 

 

The concern for investors, however, is new shutdowns.  

Many European countries announced new - and somewhat severe - lockdowns.  This will have a significant impact on the economy.  Headlines like the one below cause stocks to fall.

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Another reason for the fall in stocks was the lack of a stimulus deal.  

For months there was a back-and-forth between the two political parties, where positive news about stimulus sent stocks higher and negative news sent them lower.  Stocks kept going lower when it became clear that no stimulus is coming any time soon.
 

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Corporate earnings for the third quarter were another big story this month and the results have been pretty decent.  The stock market hasn’t been impressed, though.  Companies reporting good earnings haven’t seen their stock prices rise.  

As you can make out from the chart below, an earnings beat results in only a slight rise in the stock price. 

 

On the other hand, companies that missed their estimates were sold off sharply.

 

The main takeaway is that companies have done pretty well, but their stock price hasn’t reflected it.  

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Getting into economic data released this month, the results have been mostly positive as we continue to recover from the virus’ impact.  

Economic growth, as measured by GDP, had its biggest expansion in history.  Of course, it came after the biggest decline in history, but it shows how quickly we are bouncing back.

 

Employment appears to be improving, too.  The amount of people filing for unemployment continues to trend lower, although it still remains at a very high level.

 

The manufacturing and service sectors continue to do well.

 

Retail sales continue to grow…

 

…and durable goods, which are items with a longer life, are also slightly higher.

 

It’s not all good news, however, as the industrial side looks to be weakening. 

 

As for sentiment, small businesses are seeing a surge in optimism…

 

…but the consumer side isn’t as bright.

 

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 Where does the market go from here?  

Many indicators we follow are on the oversold (or cheap) side in the short term.  We think the odds of a rise are greater than a decline at this point.

However, the election is a big uncertainty and no one can be sure how the market will react.  A Trump victory is likely to see stocks rise based on pro-growth policies, and a Biden win may also see stocks rise in anticipation of more stimulus.  It may be a good time to buy.



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.

 

 

 

 

 

 

 

 

 

Commentary for September 2020

Hello all – we hope you had a nice September.

It wasn’t a very nice month for the markets as stocks closed lower.  The Dow was off 2.3%, the S&P declined 3.8%, and the Nasdaq, which has a higher concentration of tech companies, fell 5.2%. 

We also marked the end to a solid third quarter, with the Dow rising 7.6%, the Nasdaq was up 8.5%, and the Nasdaq gained 11%.  Here’s a look at every day of the last quarter:

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The September declines come after the best August performance in decades, with markets reaching record highs.  

We wrote last month that stocks appeared expensive and the indicators we followed were at extremely high levels, so it wasn’t too surprising to see stocks pull back a little.  

Plus, history isn’t kind to September.  It has the distinction of being the worst month of the year for the markets and usually has a negative return.  

There wasn’t a lot of news we can point to as the culprit behind the declines.  Some negative stories this month included economic data being less-positive than it had been recently.  Comments from the Fed saw a negative reaction in the market.  Also, the level of Coronavirus cases has risen.  

Mostly, though, we think the declines were due to the market getting a little overheated (or overbought, in investment jargon) and investors selling to lock in profits. 

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We’ll start with the Fed, who held one of their policy meetings this month.  We learned nothing new about their policy, which is to keep interest rates low for many years and try to raise inflation (which, as you know, we think will cause more problems down the road).  

However, the Fed did state that the economy is in need of more stimulus.  They were worried by the stalemate in Congress and the lack of any progress on another round of stimulus.  These comments saw stocks move lower as a result.

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Economic data this month was mostly positive, but not as good as it has been recently.

We’ll start with one of the indexes we show often - the Citigroup Economic Surprise Index.  It measures economic data in relation to its forecast.  If economic data comes in better than forecasted, the index rises, and vice-versa.  As you can see in the chart below, it is moving lower after record highs (it’s the light blue line).  It tells us that the economy is not as solid as economists think it is. 

 

Employment remains a concern.  The amount of people applying for unemployment remains high and hasn’t improved much over the past month. 

 

The service and manufacturing sectors remain strong:

 

People continue to spend more, with retail sales rising, although at a slower rate:

 

Confidence is also rising, amongst both the general population and small businesses:

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Lastly, the level of Coronavirus cases has seen a noticeable uptick.  We can’t find data on the severity of the cases and hospitalization levels, which is important since many people have attributed the rising cases to outbreaks on college campuses and these tend to be less severe.  Nonetheless, rising cases add uncertainty to the markets. 

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Where does the market go from here?  

Many of our indicators showed stocks reaching short-term oversold (cheap) levels earlier this month.  We think the odds of a rise are greater than a decline at this point.  

News out of Washington on a new round of stimulus remains a possibility and will be a boost to the markets.

However, this is a very volatile time of the year for the markets, especially with election approaching, so the markets may remain volatile.  

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.

Commentary for August 2020

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. 

 

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. 

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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:

 

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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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.

 

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.    

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.