Top Weekly Themes
- S&P losses ground in September, Trump tests positive: After registering gains for five consecutive months, the S&P 500 Index finally registered a losing month, giving up -3.8% during the month of September. Of note, the Index closed out every Friday during the month with a weekly loss. According to Cornerstone Macro, the S&P 500 Index has only logged four consecutive weekly losses 2.1% of the time going all the way back to 1928. Statistically, the performance in the following week has been little better than a coin flip, with the S&P 500 up about 60% of the time, vs. down a fifth week about 40% of the time. The average move in the fifth week, however, tends to be outsized, with down weeks averaging a loss of just over 2.8%, and up occurrences averaging roughly 2.3%. As of last Thursday’s close, the positive camp looked to be winning out, as the S&P 500 was up 2.5% with one trading day remaining in the week. However, with news breaking early Friday that President Trump has tested positive for the Coronavirus, premarket futures were pointing toward sharp declines to finish out the week.
- Chaos in Cleveland: Last Tuesday, the two presidential candidates squared off in Cleveland, Ohio, for the first of three scheduled debates. Given the coronavirus -related restrictions on traditional campaigning, interest in the debate was extremely high with a huge audience expected to tune in. While ground rules were agreed to in advance by both candidates, interruptions were constant and insults frequent. Candidly, this made the debate difficult to watch much of the time. Recent history shows that incumbents generally lose their first debate, and post-debate analysis seemed to indicate that Vice President Biden kept the trend intact. The next presidential debate is currently scheduled for October 15 in Miami, Florida. With a large portion of the public likely to vote by mail well before election day, the stakes for the next debate, should it occur as planned, have been heightened. As to market reaction, overnight futures showed Wall Street was in for a rough day last Wednesday. However, markets actually opened higher, aided by news that another stimulus deal, thought to be mired in a standoff, might actually be possible before the election.
- Consumer Confidence: While the stock market steadily gave ground during the month of September, consumer confidence went decidedly in the other direction. After declining for the past two months, last Tuesday The Conference Board announced that its Consumer Confidence Index® had jumped dramatically during the month of September, to its highest level since March. The reading for August was 86.3, and the consensus estimates called for September’s figure to creep up to 88.5. The actual result vaulted to 101.8. Interestingly, both of the underlying components of the Index, the Present Situation and the Expectations (next six months) moved sharply higher. While the economy is still struggling with the effects of the coronavirus pandemic, the uncertainty of the upcoming election, and stalled stimulus efforts, the figures attest to the fact that consumers generally believe that not only are current circumstances improving, but that they will continue to do so. Still, it is worth noting that from a more granular perspective, the uneven recovery and expiring stimulus measures are still weighing heavily. Specifically, while confidence levels increased for both upper- and middle-income earners, they actually declined for lower income earners. It has been frequently noted that the coronavirus-related headwinds have had a disproportionate impact on certain segments of the population, and the aforementioned confidence levels clearly evidence that fact.
|Week (%)||YTD (%)||1-Year (%)||3-Year (%)||5-Year (%)||Div Yield (%)|
|Russell 1000 Value||3.1||(11.4)||(3.4)||8.3||44.9||2.62|
|Russell 1000 Growth||5.7||25.8||40.5||82.2||151.9||0.78|
|MSCI EM (Emerging Markets)||2.6||(0.6)||11.5||8.9||55.8||2.28*|
|Bloomberg Barclays US Aggregate||(0.1)||6.8||6.8||16.6||22.7||1.18|
|Bloomberg Barclays US High Yield – Corporate||0.8||0.8||3.5||13.4||39.4||5.69|
|Bloomberg Barclays Municipal Bond||(0.1)||3.3||4.0||13.3||20.7||1.34|
|Bloomberg Barclays Global Aggregate x US (Country)||0.5||4.9||5.7||10.4||19.8||0.77|
|Crude Oil WTI (NYM $/bbl) Continuous||(3.9)||(36.6)||(27.8)||(25.1)||(13.5)||38.7|
|Natural Gas (NYM $/mmbtu) Continuous||(12.8)||15.4||10.7||(16.0)||3.9||2.5|
|Gold NYMEX Near Term ($/ozt)||2.1||25.6||28.8||48.9||71.3||1,908.4|
|Copper Cash Official LME ($/mt)||1.2||7.4||17.9||2.0||27.7||6,614.0|
|1 Week Ago||YTD||1-Year Ago||3-Years Ago||5-Years Ago||Current Level|
|U.S. Dollar per Euro||1.16||1.12||1.09||1.18||1.12||1.17|
|Japanese Yen per U.S. Dollar||105.48||108.68||107.86||112.57||119.65||105.64|
|U.S. Dollar per British Pounds||1.27||1.32||1.22||1.34||1.52||1.29|
As of October 1, 2020 (close) *Dividend Yield For MSCI EAFE and MSCI EM are from 8/31/2020.
Charts of the Week
DAILY U.S. COVID-19 TESTING TRENDS
Johns Hopkins announced a grim milestone last week, specifically that total worldwide deaths due to the COVID-19 virus had surpassed the one million mark. This comes shortly after deaths due to the virus moved above the 200,000 threshold in the United States.
Prior to the approval of a safe and effective vaccine, one of the keys to combatting the spread of the virus is the increased availability of testing, with timely results. As the chart above displays, after ramping steadily higher, the number of daily tests done in the United States has been relatively rangebound for the past few months. Further, while certain tests have relatively rapid turnarounds, many still entail waiting days for results.
With many schools, colleges, and businesses open around the country, and flu season just around the corner, more widely available testing, with quick results, is imperative. Thankfully, during the final week of August, Abbott Labs – a longtime holding within our individual equity strategies – announced that they have developed such a test, with a cost of just $5.00 and a turnaround time of 15 minutes.
The U.S. government has contracted for 150 million of these tests and announced that the first 6.5 million tests would be distributed last week. When Abbott Labs unveiled their test, they indicated that 50 million tests would be available each month starting in October, which if fully utilized by the U.S., to more than double the amount of testing being completed at present and radically reduce the average window of time between the test and results.
After many months of grim news on the COVID-19 front, and with the challenges of flu season fast approaching, a more widely available test with rapid results finally appears to be at hand.
The chart above details the change in the Price Earnings (P/E) ratio for the S&P 500 based on estimated earnings for the next 12 months. Valuations have skyrocketed over the past six months as the perception of financial market risks have fallen.
The above-right table details performance by sector, then segmented by the change in earnings for that sector for the year, along with the change in P/E for that sector.
With fewer upside catalysts and increasing uncertainty regarding the election, the COVID-19 virus, and whatever else 2020 has in store for us, we’re expecting that stock market highs (roughly 5.5% above current levels) are in for the year.
However, market risks are balanced. Although the upside is limited (P/Es found their ceiling and EPS expectations have already bounced sharply off their shutdown-lows), we don’t foresee material downside as stocks have recently corrected, and, outside of exogenous risks (election, geopolitics, and COVID-19), we don’t face the traditional P/E-compression trends such as a Fed tightening cycle, overheating inflation, or a cyclical slowdown in leading economic indicators.
Looking ahead, we believe equity returns are likely to moderate as the driver of future gains transitions from P/E expansion to earnings.