Market Strategy 7/20/2020
Don’t Bring Me Down
With the S&P 500 index less than 5% away from its February 19 peak, investors need to keep their eyes on the ball.
Key Takeaways
- In the week ahead 92 companies across a wide swath of sectors of the S&P 500 report results. As with the big banks that reported last week results will likely be mixed, identifying winners and losers in a tough environment of unprecedented dimension.
- Persistent resurgence of the Covid-19 virus stateside and in countries around the world remains a near-term hurdle for global markets.
- Data on retail sales surprised positively for a second month in a row on strong sales of big-ticket items.
- Domestic politics will begin to move to the forefront of investor focus as the conventions of both parties draw nearer.
There are few guarantees in life but one thing appears certain in the depths of summer 2020 is that no matter how hot the days get it won’t be a sleepy summer for investors of all ilks (bulls, bears, skeptics and the nervous) as the markets navigate the challenges ahead. Three major thematic investment ideas that are likely to dominate the headlines from here into and through August:
- COVID-19;
- Q2 earnings results and any form of guidance given for what lies ahead;
- Politics with Democratic and Republican conventions ahead (selection of VP and platform for Democrats and the platform for the incumbent).
A fourth risk we believe many investors face is the proverbial “missing the forest for the trees.” As unlikely as it may seem at this time there probably will be a day when all three of the aforementioned thematic concepts (“trees” in the timeline of history) will be distant in the rearview mirror. Goals and objectives reaching intermediate and longer term into the future remain to be addressed. Like the song says, “Time waits for no one and it won’t wait for me.”
Whether it’s investing for current income, capital appreciation, total return, retirement, education, philanthropic objectives, or corporate and other institutional players taking the time to address such things notwithstanding the “crisis du jour” makes sense. Investing in times of crisis is never a walk in the park from our experience but in hindsight has often been the best of times in which to invest—but prudently.
Diversification is key in our view. Know your objectives and your tolerances for volatility as well as for lulls in the markets, in sectors, asset classes and cyclical and secular trends. We have found patience to be one of the great virtues of investing along with the stamina that comes with experience.
Last week saw the information technology sector give back some (but not much) of its recent gains. Opportunity for profit taking without FOMO (fear of missing out) surfaced as a catalyst for bears, skeptics, nervous investors and short-term investors after a bellwether stock within the FANG grouping missed growth expectations in Q2.
As a result S&P 500 sectors that have lagged on a year to date basis (including industrials, materials, health care, utilities, energy, financials, and consumer staples) outperformed technology and the underlying index last week.
Among last week’s laggards were real estate, communications services, information technology and consumer discretionary. These rank among the leadership from the start of the year.
We don’t think that tech and consumer discretionary have so much lost favor with investors but rather that investors are looking to broaden their exposure among the asset class (equities). This was also evidenced by small and mid-cap stocks outperforming the large caps last week.
With the Covid-19 resurgence moving across too many states and countries to deny its danger and with fixed income yields at or near historical lows (depending on what tranche and where you look) diversified portfolios overweighted to equities continue to appeal to us.
In The Week That Was
Last week saw positive surprises as well as disappointments when five of the big banks reported. Lines of business and the quality of business as well as execution made the difference between winners and losers. By the end of the week the financials sector had gained 2% and ranked sixth out of the seven sectors that outperformed the underlying benchmark last week. We continue to rate the financial sector “outperform” on expectations that the sector will be among the leading sectors in what we expect to be a global economic recovery once Covid-19’s spread is stemmed.
In the week ahead a raft of economic data is poised to cross the transom including the Chicago Federal Reserve Activity Index, MBA mortgage applications, FHFA House Price Index, existing home sales, initial and continuing jobless claims, the Conference Board’s Leading Economic Indicator, the Kansas City Federal Reserve’s Manufacturing Activity, and New Home sales.
Q2 earnings moves forward with 92 companies scheduled to report this week including bellwether names in information technology, energy, airlines, industrials, consumer discretionary, consumer staples and financials.
We remain constructive on equities and favor cyclicals over defensives; we are overweight US stocks while maintaining meaningful exposure to international developed and emerging market equities.
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