As the markets shook off the election uncertainty of October and positive vaccine news dominated the headlines, equity markets quietly drove toward record highs in November. Additionally, as investors breathed a sigh of relief that checks and balances would remain in place within the federal government, increased optimism of renewed fiscal stimulus rose. The S&P 500 finished the month higher +10.95%. 

Mondays in November seemed to be for positive vaccine news. As it became increasingly apparent that the end of the pandemic was nearing, investors began to rotate their equity exposure by moving their allocations from sectors and industries that benefitted from the lockdowns and shifting to more cyclical names badly hurt by the restrictions of the pandemic. All 11 major sectors of the index were positive on a total return basis. Energy, a perpetual laggard, saw the greatest rebound during the month, returning a whopping +28.03%. 

Small cap stocks continued to blaze a trail forward. The Russell 2000 Index ended November  +18.43%, putting small cap stocks on pace for their best quarter in history.

Source: Strategas Technical Strategy Daily Report, December 16, 2020

In my opinion, the biggest risk to the market is that it is too optimistic. As I have personally witnessed, anyone who suggests near-term caution is viewed as a little out of touch, but signs persist that we may see real economic weakness in the coming months. The market doesn’t appear to be accounting for this weakness. Strategas’ Sentiment Dashboard currently shows that signs of bullishness are more pronounced, with three statistically extreme readings among the basket of sentiment indicators.

Source: Strategas Technical Strategy Daily Report, November 30, 2020

While sentiment is bullish, the double dip in Europe is clear. Lockdowns overseas have had serious economic consequences and there are signs that the United States could see similar results. Consumer sentiment and consumer confidence came in below consensus during November, weekly jobless claims are rising, and personal income fell in October. Fiscal stimulus continues to be incredibly important at this juncture. More and more individuals are shifting to emergency unemployment benefits, which are currently at risk of expiring. State & local governments continue to seek aid from Washington to support the growing health care burden. The biggest concern is the survival of small businesses. Many small businesses are making decisions on whether to close, or to continue to give it a go for a few more months. It is reasonable that the broader macro economy can look past some of these items (for example, if a restaurant closes, another will likely take its place in the future). Unfortunately, the costs of the pandemic are falling on those least able to bear it, which only increases the urgency for overdue stimulus, especially if the U.S. labor market data weakens more significantly. 

2021 is certainly going to be a year where the story is about pent up demand as vaccines allow for lives and economies to begin to return to normal. The question is how difficult will the climb be from now until then? Only time will tell. 

This material was prepared by the Spotlight Asset Group (“SAG”) Chief Investment Officer (“CIO”) and is presented for information purposes only. The views offered are those of the author and are subject to change. This information is not intended to provide investment advice or solicit or offer investment advisory services. All information and data presented herein has been obtained from sources believed to be reliable and is believed to be accurate as of the time presented, but SAG does not guarantee its accuracy. You should not make any financial, legal, or tax decisions without consulting with a properly credentialed and experienced professional. Investing involves risk and past performance is no guarantee of future results.

As the third quarter came to a close, the month of September was a difficult one for stocks. Global equity markets finished in the red after 5 straight months of gains. The S&P 500 lost -3.80% during the month. Only 2 of the 11 GIC sectors were positive during the month. Momentum previously seen in technology and communication services stalled, as those sectors declined -5.37% and -6.47% respectively. The declines continued to hit the energy sector the hardest, as the sector declined -14.51% during the month. The sector is now down a whopping -48.09% for the year. 

With just over a month to go, the focus has begun to turn to the upcoming presidential election, with both Democrats and Republicans searching for an edge with voters. This shift of focus paired with the battle over the now vacant supreme court seat, following the passing of Justice Ruth Bader Ginsburg, has made the prospects of another round of fiscal stimulus unlikely. The lack of additional stimulus makes the impact of the COVID-19 limitations weigh on many sectors, especially those that are service related, likely stalling any additional economic improvements in the U.S. This is already evident in the labor markets. Initial jobless claims have been flat since late August and small business employment has begun to show signs of weakness.

Despite the doom and gloom, the market correction we have experienced in September should be viewed positively. Throughout the summer months the market seemed to get well ahead of itself and valuations have come down from their highs in August. Market corrections are healthy and normal. They act as a self-correcting mechanism often chasing away speculators. Corrections also provide investors with more attractive entry points into stocks that have strong momentum and sustainable long-term earnings growth. Overall, September was difficult but not necessarily a sign of impending doom. As we enter the final stretch of 2020, we all want to focus on 2021, putting this difficult year behind us. However, I caution you from ignoring the fact that the remaining months of 2020 are likely to be just as unpredictable and volatile as the 9 months that proceeded them. There will likely be more opportunities to take advantage of technical and fundamental dislocations as investor behavior continues to be heavily influenced by the headlines. 

This material was prepared by the Spotlight Asset Group (“SAG”) Chief Investment Officer (“CIO”) and is presented for information purposes only. The views offered are those of the author and are subject to change. This information is not intended to provide investment advice or solicit or offer investment advisory services. All information and data presented herein has been obtained from sources believed to be reliable and is believed to be accurate as of the time presented, but SAG does not guarantee its accuracy. You should not make any financial, legal, or tax decisions without consulting with a properly credentialed and experienced professional. Investing involves risk and past performance is no guarantee of future results.

August was a record month for equities, which experienced their best returns since April. The S&P 500 returned +7.19% during the month, riding the continued strength of technology and communication services. Mega cap stocks continued to lead the pack, and growth handily outperformed value. Non-US developed markets rebounded a bit from July. Emerging markets were the key area of weakness for global equities in August. Chairman Powell’s statement in late August marked a new strategy for the Federal Reserve. One that placed greater emphasis on maximum employment vs. managing inflation targets. This suggests the Fed will maintain looser policy over the next cycle. The news led to weakness for fixed income, with the Barclays Aggregate Bond Index finishing the month in the red, down -0.81%.

Progress in the fight against COVID-19 remained positive as several promising developments were reported during the month. Abbott Laboratories announced the FDA had given them the green light to begin manufacturing its $5 rapid result COVID-19 test. This test is a potential game changer as it allows for much quicker identification of individuals with the virus and can halt the spread much more quickly than in the past. Additionally, Moderna announced positive results from their current vaccine trials, particularly within the high-risk category of the population, those ages 65 and older. This progress paired with the slowing of the second wave in the U.S. as well as largely positive economic data helped drive stock prices higher. 

As Q2 2020 earnings season has come to a close, S&P 500 companies largely reported stronger earnings than expected. Per FactSet’s recently released Earnings Insight report, as of August month-end, 98% of the companies had reported results, 84% of which reported a positive earnings surprise, 65% reported a positive revenue surprise. If 84% is the final percentage, it will mark the highest percentage of S&P 500 companies reporting a positive EPS surprise since FactSet began tracking this metric in 2008.

A lot of attention has been given to valuations of late, and for good reason. With markets reaching new highs while the global economy remains constrained by the pandemic, equities do appear quite frothy. What is more interesting is the dispersion of returns. Year to date, information technology has been the best performing sector, returning a remarkable +35.99% vs. the worst performer, energy, which has declined -39.28% over the same period. In fact, only 3 sectors are responsible for the strong returns we’ve seen: Information Technology, Consumer Discretionary and Communication Services.

That disparity in returns largely explains the deep divide between growth and value. As the value indices are heavily weighted to energy, financials, and utilities, all of which have lagged the broad markets. Most forget the relationship between growth and value is secular and tends to persist over many years. Today, low interest rates and specific sector challenges serve as a headwind to value stocks, but the relationship will reverse at some point in the future. It always does. The recent sell-off reminds us the importance and rebalancing. The markets certainly have a way of keeping us humble.

This material was prepared by the Spotlight Asset Group (“SAG”) Chief Investment Officer (“CIO”) and is presented for information purposes only. The views offered are those of the author and are subject to change. This information is not intended to provide investment advice or solicit or offer investment advisory services. All information and data presented herein has been obtained from sources believed to be reliable and is believed to be accurate as of the time presented, but SAG does not guarantee its accuracy. You should not make any financial, legal, or tax decisions without consulting with a properly credentialed and experienced professional. Investing involves risk and past performance is no guarantee of future results.

The month of July was a volatile one. Despite the prolonged rise in new cases of COVID-19, the markets remain strong. Economic data early in the month lifted equities higher, but by mid-July, investors seemed to finally realize that we are still at war with the virus and the economic destruction is not necessarily behind us. 

The S&P 500 returned 5.64% during the month. Early month strength was followed by mid-month declines as economic indicators began to turn more negative. Mega cap stocks led the way in July with mid-caps not far behind. Small cap and value-oriented names lagged. Non-US developed markets struggled as they too began to see a second wave impact on their economies. On the flip side emerging markets soared driven by unexpected strength in economic data out of Asia.

Positive vaccine progress and positive economic data early in the month were overshadowed by growing concerns about the resurgence of cases in the United States and abroad. As July reached its halfway point the markets shifted following negative employment data and a decline in consumer spending in parts of the U.S. raised investor concerns that the economic rebound maybe stalling. Breaking a 15-week stretch of declines, U.S. initial jobless claims of 1.42 million were higher than the consensus estimate of 1.3 million and the previous week’s claims of 1.3 million. Growing tensions between the United States and China weighed heavily on sentiment pushing down treasury yields. 

The month ended with a jarring second quarter GDP growth report, showing a jaw dropping -32.9% decline. It’s important to remember this was an annualized number based on the quarterly decline continuing in the future. In actuality Real GDP declined -9.5% from the first quarter to the second quarter. While certainly shocking, it was largely expected as broad lockdowns across the country shut down most business activity for much of the quarter. What was unusual was the fall in GDP was driven by a -34.6% plunge in consumption as the lockdowns in late March and April forced consumers to stay at home. Consumption is not typically the key area that drives GDP declines, but as we already know this downturn is anything but typical. Services consumption was down by -43.5%, with the biggest declines coming in healthcare, as non-essential check-ups and procedures were delayed, recreational services, and spending at bars and restaurants.

Source: Capital Economics US Economics: US Data Response GDP (Q2) July 30, 2020

In some respect the GDP report was old news, as we all knew and expected a massive downturn. The markets have shifted focus to the 3rd quarter and early indications are that the strong rebound in activity we saw in June will likely have leveled off in July. Personal consumption rose 5.6% in June, but renewed lockdowns and increased spread of COVID-19 will likely see that number decline in July. Estimates for non-farm payrolls are down from June but are still expected to be positive. Unemployment, especially continued claims remains elevated. The Federal Reserve remains accommodative and the U.S. government continues to negotiate some sort of extension to the pandemic financial support programs that expired at the end of the July. 

Overall, I think it’s important to keep expectations in check. As we’ve seen thus far, the situation with the pandemic is quite fluid and change comes quick. While the strong earnings reports of the tech giants seem to indicate things may not be so bad for equities, it’s still early and technology companies aren’t reflective of all sectors. 

This material was prepared by the Spotlight Asset Group (“SAG”) Chief Investment Officer (“CIO”) and is presented for information purposes only. The views offered are those of the author and are subject to change. This information is not intended to provide investment advice or solicit or offer investment advisory services. All information and data presented herein has been obtained from sources believed to be reliable and is believed to be accurate as of the time presented, but SAG does not guarantee its accuracy. You should not make any financial, legal, or tax decisions without consulting with a properly credentialed and experienced professional. Investing involves risk and past performance is no guarantee of future results.