Top Weekly Themes
- Big Tech Earnings – Good Enough? Across the board, earnings of mega-cap tech companies like Apple, Amazon, and Facebook were strong, beating expectations both on revenue and earnings. However, as we have discussed, the bar was raised perhaps too high for these companies, given their current share prices. For example, Apple beat estimates for both revenue and earnings per share, however, iPhone sales were a bit light, and data from China was also softer than anticipated. That was enough to send the stock down over 5% on Friday. Similar stories played out for other tech giants, as any blemish led to further selling. Overall, the S&P 500 Technology sector is down 13.2% since the beginning of September, while the broad S&P 500 is down 9.1%. We continue to think high expectations and very high valuations will be a headwind to the relative performance of the big pandemic winners as we move throughout 2021.
- COVID-19 Cases Rise. The United States reported a daily record 90,000 coronavirus cases last Thursday. The increase in cases has not been isolated to the U.S., as Europe is dealing with an even more pronounced increase. That said, it appears as though deaths are rising at a slower pace than during the first spike earlier in the year, and the mortality rate remains low. We believe the combination of increasingly worrisome virus headlines, with a delay in additional fiscal stimulus, are the primary drivers of the recent market sell-off. In our view, the next few months may be difficult, both from a market and virus perspective, but we also do not think that far reaching lockdowns are likely. The recovery will be bumpy, but with a better understanding of the virus and a vaccine likely in 2021, we continue to believe the economy will be better a year from now than it is today.
- When Will the Selling Stop? As of this writing last Friday, the S&P 500 was down 6.4% for the week. As with any market correction, investors want to know if we are close to a near-term bottom. Although we are the first to admit it is very hard to know, we can use certain signals to help guide us. First, over 50% of stocks in the S&P 500 have made new 20-day lows. Although this signal is often early when the market is in a longer-term uptrend, as it is today, a spike in 20-day lows over 50% usually is an indication that we are getting close to some stabilization. In addition, 3,200 on the S&P 500 is the next level of technical support. This will be a closely watched price as an indication of whether or not this current bout of market volatility will continue.
Returns Table
| Equities | Week (%) | YTD (%) | 1-Year (%) | 3-Year (%) | 5-Year (%) | Div Yield (%) |
|---|---|---|---|---|---|---|
| S&P 500 | (4.1) | 4.0 | 11.1 | 36.0 | 75.2 | 1.76 |
| Russell 1000 Value | (5.2) | (12.6) | (7.7) | 5.5 | 32.3 | 2.66 |
| Russell 1000 Growth | (3.0) | 23.1 | 32.8 | 71.9 | 126.9 | 0.82 |
| Russell 2000 | (4.2) | (5.4) | 0.4 | 7.9 | 43.7 | 1.60 |
| MSCI EAFE | (4.5) | (10.0) | (5.8) | (1.1) | 19.4 | 2.67* |
| MSCI EM (Emerging Markets) | (1.4) | 2.7 | 10.1 | 9.6 | 51.6 | 2.35* |
| Fixed Income | Week | YTD | 1-Year | 3-Year | 5-Year | Yield |
| Bloomberg Barclays US Aggregate | 0.1 | 6.4 | 7.0 | 16.4 | 22.4 | 1.23 |
| Bloomberg Barclays US High Yield – Corporate | (0.9) | 1.2 | 3.3 | 13.4 | 35.9 | 5.77 |
| Bloomberg Barclays Municipal Bond | 0.1 | 3.0 | 3.9 | 12.8 | 20.0 | 1.40 |
| Bloomberg Barclays Global Aggregate x US (Country) | (0.6) | 5.3 | 5.9 | 12.4 | 21.1 | 0.73 |
| Commodities | Week | YTD | 1-Year | 3-Year | 5-Year | Current Level |
| Crude Oil WTI (NYM $/bbl) Continuous | (11.0) | (40.8) | (34.9) | (32.9) | (21.5) | 36.2 |
| Natural Gas (NYM $/mmbtu) Continuous | 13.6 | 56.1 | 29.5 | 15.3 | 51.4 | 3.4 |
| Gold NYMEX Near Term ($/ozt) | (1.9) | 22.8 | 25.5 | 47.1 | 62.6 | 1,865.6 |
| Copper Cash Official LME ($/mt) | (2.8) | 8.7 | 13.8 | (2.0) | 29.7 | 6,692.0 |
| Currencies | 1 Week Ago | YTD | 1-Year Ago | 3-Years Ago | 5-Years Ago | Current Level |
| U.S. Dollar per Euro | 1.18 | 1.12 | 1.11 | 1.16 | 1.10 | 1.17 |
| Japanese Yen per U.S. Dollar | 104.81 | 108.68 | 108.84 | 113.84 | 121.14 | 104.70 |
| U.S. Dollar per British Pounds | 1.31 | 1.32 | 1.29 | 1.31 | 1.53 | 1.29 |
As of October 29, 2020 (close) *Dividend Yield For MSCI EAFE and MSCI EM are from 9/30/2020.
Chart of the Week
Key Takeaways
- Usually, the performance of international stocks, relative to U.S. stocks, is strong when the U.S. dollar is weakening.
- We can attribute this to several factors: First, the notion that the U.S. dollar tends to be a counter-cyclical currency (meaning it weakens as global growth accelerates given its safe-haven status), and international stock indexes are much more heavily weighted to cyclical sectors when compared to U.S. indexes.
- Another factor relates specifically to emerging markets. Emerging market economies have accumulated large amounts of dollar-denominated debt in recent years. As the dollar falls relative to their local currencies, it makes servicing that debt easier.
- The chart above shows that international equities have been slow to react to the recent move lower in the dollar. We believe that the dollar will stay weak, or weaken further, and the relationship between international stocks and a weakening dollar will reassert itself, leading to a period of better relative performance.
Commentary
Small Caps Time to Shine?
Although the economic recovery story is being called into question with the resurgence of COVID-19 cases throughout the country, we think the next few months will be more of a bump in the road than a reversion to the type of severe economic contraction seen earlier this year.
Historically, small cap stocks have outperformed during accelerations in economic growth. Interestingly, if we use total railroad traffic as a proxy for economic activity, small caps should continue to perform well versus large cap.
Furthermore, as railroad traffic increases, junk bond credit ratings also tend to improve. This is a positive for the performance of small cap equity indexes, which tend to include a higher percentage of more challenged credit.
