A Low Bar

Stocks rallied in August, jumping 7.2% for the month as measured by the S&P 500.  This is unusual, as stock prices typically take a bit of a pause while many Wall Street traders close out the summer in the Hamptons.  For the year, stocks are now up 9.7%, a surprising reversal from the -19.5% returns we struggled with at the end of March.  Stocks are up 5 consecutive months now, and a whopping 36.4% from the end of March.

As I’ve mentioned before, stock prices are an important leading indicator.  The stock market is a discounting mechanism, an indicator of investors’ future expectations, which includes the direction of stock prices.  August was a remarkable month; of the 21 trading days, prices moved higher on 17 of those days or 81% of the time.  According to Bespoke Research, since 1993 (the inception of the SPY ETF which tracks the S&P 500) there have only been six other months where prices were up more than 75% of the available trading days.  Interesting for us to bear in mind, after each of those frothy periods, stock prices tended to continue their uptrend for the ensuing six and 12 month periods.

The news flow pertaining to the election, the virus, and shaky economies around the globe has dominated the lens through which many investors view the stock market.  While the news has stirred emotions and created a nearly impossible disconnect between what people perceive and what the stock market does, there is quite a bit of underlying support for what is propelling stock prices upward. 

The primary factor behind the markets remarkable run since the end of March has been the immediate and aggressive response by the Federal Reserve.  The Fed’s moves created liquidity for the markets, backstopping credit and lowering interest rates which restored confidence in the US, and around the world.  The de-risking of credit markets and the expansion of the P/E (the market multiple) through historically low interest rates have catalyzed higher stock prices.  A second critical factor was the quick response by Congress to provide fiscal support, putting money in the hands of those that lost their jobs.  The CARES Act pumped $2.2 trillion into the economy at various levels.  Another $1+ trillion is under consideration.   These figures dwarf the $787 billion American Recovery and Reinvestment Act passed by Congress in early 2009 during the Great Recession.

Wall Street analysts typically over-do it, and with the onset of the virus in March, they began to cut earnings forecasts, only to see them handily beaten by actual 2Q results.  Now analysts are rapidly increasing their estimates, and according to FactSet Research, are forecasting a 29% jump in earnings in ’21 (led by consumer and industrials).  The pattern has been one of weak but improving data.  As lowered expectations are beaten, again and again, the market has been coaxed higher supported by the relative improvement.

Somewhat hidden is the fact that the economy is recovering.  The excessive damage to service, travel, retail and dining has been more than offset by the pull-forward of a massive cloud based digital economy. Work from home, school from home, shop from home are all factors that have “modernized” our economic lives in ways we would never have imagined only a year ago.  The emergence of 5G, the continued expansion of the internet of things, immense cloud infrastructure and the preponderance of the distributed workspace will perpetuate this transformation.

At this point, our portfolios have benefitted from strong weights in consumer and technology growth stocks, many immune to the economic disruption caused by the virus.  We are also continuing to add exposure to more cyclical companies, many heavily impacted by the virus and now clearly recovering.  This balanced, or barbell, strategy will remain in place for the time being.   

As always we look forward to speaking with you, or “Zooming” if that has become a part of your routine.  We are always available to review your portfolios, strategize as we head toward the election and review you year-end tax planning.  Typically, one or two of us are working out of the office, while the rest continue to work remotely.  Please, be safe out there.


Bruce Hotaling, CFA

Managing Partner

The views and opinions stated herein are those of Bruce Hotaling, are of this date, and are subject to change without notice.   Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed.  Investments are subject to market risk, including the possibility of loss of principal.  Past performance does not guarantee future results.  The S & P500 is an unmanaged index of 500 widely held stocks.    Investors cannot invest directly in an index.   The PE ratio (price/earnings) is a common measure of relative stock valuation.

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