Midsummer Thoughts and Observations
While the pandemic has prevented face-to-face meetings, communicating with clients in other ways has become more important than ever. There are some very interesting things happening in the market right now and I wanted to share some thoughts and observations with you.
It seems like just yesterday the stock market was plunging at a record pace. From February 19th through March 23rd, the S&P 500 Index dropped a whopping 35.4%. Since then, the S&P 500 has *almost recaptured its losses and as of July 31st, was within 4% of its intra-day all-time high set in mid-February.
However, the rebound of the S&P 500 Index doesn’t tell the whole story though. While the S&P 500 Index has long been seen as a broad market barometer to gauge how the overall stock market is performing, it may not be as good of an indicator as it once was. The S&P 500 is “market cap weighted,” meaning companies in the Index who are larger represent a bigger part of the Index. For example, the top 5 positions in the Index as of July 31st (as represented by the ETF “SPY”) were Apple, Microsoft, Amazon, Google and Facebook. These 5 companies represent a whopping 21.55% (!!!) of the Index. That’s not a whole lot of diversification. The other 501 companies (the ETF actually holds 506 stocks), represents the other 78.45%. In fact, the smallest 19 companies in the S&P 500 Index (according to SPY) each represent 0.01% or less.
These mega cap technology companies have driven the S&P 500 Index’s performance so far this year into slightly positive territory. SPY is +2.52% YTD through July 31st. But, the S&P 500 “equal weighted” ETF, ticker: RSP, is -6.35% through July 31st. So, if every company in the S&P 500 had an equal weight in the Index and you ignored the size of the company, the Index is actually negative YTD. This is a great illustration showing just how much those mega cap technology companies are holding up the market. Another interesting data point is the Russell 2000’s YTD performance. This index represents 2000 small cap companies and is underperforming the broader market even more so far this year. The ticker IWM, iShares Russell 2000 ETF, is -10.42% YTD through July 31st.
Separately, there has been a distinct divergence between “Growth” companies and “Value” companies through July 31st. Schwab’s Large Cap Growth ETF, SCHG, is +18.19% YTD while its Value counterpart, Schwab Large Cap Value, is -12.29%. Technology’s YTD dominance has also played a part in this as the top holdings in SCHG are, you guessed it, Apple, Microsoft, Amazon, Facebook and Google. This is a great example of why we hold a separate Value and Growth position in most client portfolios. Such divergence creates rebalancing opportunities.
While the S&P 500’s performance has been rosy lately, there are some troubling signs in other areas of the market. Often seen as a safe haven, Gold closed at a record high on Friday, July 31st, and crossed $2000/ounce for the first time in its history. As the Fed has pumped the system with liquidity, Gold has benefited as it is often viewed as a protection from inflation. Many clients’ portfolios have benefited this year from the addition of Gold through the ticker GLD.
Also, the 10-year Treasury note had a record low close on Friday, July 31st, of 0.5282%. It did, however, have a lower “intra-day” low back on March 9th when it hit 0.39%. But, even going back to the financial crisis of 2008, it never closed the day as low as it did on Friday. Lower bond yields generally signal trepidation over the U.S. economy’s health.
The stock market surge from the recent market bottom in March seems like a different story than what the economy and recent COVID-19 cases are telling us. The unemployment numbers continue to be high and recent economy reopening setbacks are raising some red flags. While we don’t think investors should attempt to time the peaks and valleys of the market, we have slightly increased cash and fixed income positions in an effort to manage portfolio volatility.
If I can answer any questions, please don’t hesitate to reach out.
