Monday Morning QB - Market Observations:
- U.S. Virus Cases Climb Above 3 Million
- New Case Data Suggests the Pace of the Virus Surge is Accelerating
- Initial Unemployment Claims Continue to Decline
- Investors Are Buying Up Mega Cap Growth Stocks…Helps NASDAQ Reach New Record High
- Treasury Security Hopes for Another Bi-partisan Stimulus Package Before the End of the Month
- Earnings Season Starts this Week…A Catalyst for Further Stock Gains or a Reversal?
- Will Company Guidance Include Potential Future Covid-19 Impacts?
Monday Morning QB - Market Performance:
The word to describe last week’s market activity is “Choppy” as the market seemed to stumble through the virus news. The major U.S. indexes ended the week mixed with large-caps outperforming small-caps.
The technology-heavy NASDAQ Composite outperformed the other major indexes by rising 4.0% to a new record high of 10,617. The Dow Jones Industrial Average rose 1.0%, finishing the week at 26,075.
By market cap, the large-cap S&P 500 finished the week up 1.8%, while the mid-cap S&P 400 and small-cap Russell 2000 retreated -0.3% and -0.6%, respectively.
Despite numerous short bursts of outperformance, small- and mid-caps have yet to mount a sustained period of outperformance. They remain substantially negative year to date at -14.7% for the Russell 2000 small-cap index and -14.1% for the S&P 400 mid-cap index. Heading into earnings week, we did add a little mid-cap growth, via an exchange-traded fund (ETF) to the portfolio.
The Virus Surge
Last week the U.S. surpassed the 3 million confirmed Covid-19 case mark. The much-debated questions are why the surge is happening, and why is the number of positive tests relevant to your portfolio?
Many economists believe that 'how goes the virus' is the determinant of your stock returns in the future.
The surge in cases can be attributed to increases in the number of tests given as well as the rates of positive tests. I guess the silver lining is much of the spike in the number positive test results can be attributed to asymptomatic spread among young people (18 to 40). The younger people, in general, tend to have milder symptoms and therefore recover faster. Of course, the fear is what happens to the people they encounter, especially Mom, Dad, and the Grandparents.
More contact seems likely as we all seem to be suffering from social distancing fatigue. Combine fatigue with the will to travel, record RV sales and rentals, and we see all contributing to the rise in positive tests.
In addition, regular summer travel likely has contributed to the spread. Living near Wrightsville Beach, we have seen many out of state plates on top of the in-state beachgoers. Boating, fishing, beaching, and just generally enjoying the ocean is in full swing. Even though these activities are outside, they have led to more individual contact. More contact has led directly to an increase in positive tests.
Testing delays have helped to increase the spread as well. As the surge in cases has climbed, the pressure from more individuals requesting testing is mounting on the testing centers to keep up with demand for testing. The CDC, manufacturers of the tests and laboratories were not prepared for this wholesale quest for tests, but for more localized testing in so-called hotspots, so have not been able to produce, administer and process tests as quickly as hoped, delaying the time between tests and results.
Meanwhile, potentially positive people are likely not putting themselves through quarantine until the results are known and ignorantly passing the virus on to others. The chain reaction creates an almost impossible scenario to contact trace amplifying the difficulty in containing the spread.
From the mouth of Dr. Fauci – “If you are going to do contact tracing and the test comes back in five to seven days, you might as well not do contract tracing because it is already too late.”
Unfortunately for the investment community, the higher the virus count climbs, the potentially lower your future account values may be. Will company’s weigh-in by giving future guidance about the potential effects of Covid-19 on earnings?
Future direction is one theme we will be paying close attention to as we go through the next six weeks of earnings reports.
More Stimulus Anyone
Many investors that I talk with are baffled by the rise in the stock market.
So far, stronger than expected consumer spending has been given some of the credit for the stock market ascendance. They see what is going on with the virus and expect more positive cases to lead to less retail sales.
Fiscal and monetary policies have kept the consumer going, creating easy money for Americans to save or spend.
Fed Chair Powell has produced the most accommodative federal reserve policy in history combined with the already enacted largest massive stimulus plan in history by the Trump Administration. Given the amount of fiscal and monetary stimulus, it is easy to see why the stock market has responded favorably.
For those who are surprised by this result look no further than the Bush (TARP) and Obama (American Recovery and Reinvestment Act) programs, combined with the Federal Reserve actions, for the stock market results coming out of the Great Recession.
Before this month is over, Treasury Secretary Steven Mnuchin (with bipartisan support) hopes to pass another coronavirus economic aid package. The administration supports a second round of payments to households, an extension of unemployment benefits, and a more targeted paycheck protection program to aid small businesses.
The hope for the stock market is that even if the positive case rate continues to climb, the addition of another stimulus package combined with continuing easy money from the Federal Reserve will keep pushing the stock market to make new highs.
All our indicators are currently positive, allowing for the maximum stock percentage in your portfolio that your risk tolerance will allow.
We remain cautiously optimistic, but also vigilant. I personally would feel much better if we would reopen everything while following the simple practices of avoiding crowded areas and maintaining a safe distance while wearing a mask.
The best of both worlds could lead to even more significant gains in the stock market.
This week kicks off earnings season for stocks- that is, if companies actually report earnings including forward guidance. Otherwise the market will continue to be news headline-driven.