An Update Regarding Market Volatility

An Update Regarding Market Volatility

Recent market volatility during the month of May has made many investors nervous and for good reason. The market is in the midst of a change in momentum and the shift has been sudden. First, it’s important to note, the U.S. economy is recovering rapidly from the COVID-19 pandemic. Many different factors are at play in the recovery: the rollout of vaccines, the lifting of restrictions, loose monetary policy, and a massive increase in government spending. The problem is that the massive government “stimulus” checks have put the economy in a strange position, where retail sales are far above where they would be if COVID had never happened, even as the production side of the economy remains relatively weak. Pandemic unemployment benefits, paired with lack of childcare options has resulted in a strange dynamic for employment, plenty of jobs and not enough job seekers. Add to that the inflationary effect of the economic recovery and suddenly we find ourselves with very unusual market dynamics.

One of the questions we are most frequently asked is about the rotation from growth to value. Growth stocks tend to be companies that are smaller or are in more volatile sectors of the market like technology.  Tesla would be a good example of a growth company.  Value companies are usually larger and are more likely to be staples of the economy.  Walmart would be a good example of a value stock.  This rotation from growth to value which began in October, is not an unusual market event. Growth had been outperforming value for the better part of a decade, as economic conditions strongly favored growth stocks (interest rates trending lower, inflation at historically low levels, slow and steady economic growth). The chart below illustrates the relationship between growth and value over time.

An Update Regarding Market Volatility 1

Source: MPI Stylus

Typically, value does best in the recovery stage of a recession when interest rates are moving upwards and when inflation is rising. Value sectors like energy, materials and financials thrive under those conditions.  

At Spotlight we anticipated this shift and began positioning our portfolios accordingly earlier this year. Specifically, we added more active managers to our investments over the last several months. We believe active management is more successful when the market is more volatile, and we feel we have had success in selecting high quality active managers. The table shown below illustrates how well our active managers have performed in the last 12 months. All our active equity managers are outperforming the S&P 500. This is even more apparent in the fixed income space, as all four of our fixed income strategies are actively managed, and all four are handily beating the Barclays U.S. Aggregate benchmark. 

An Update Regarding Market Volatility 2

Additionally, over the past year we have implemented a risk budgeting approach to our portfolio construction.  Rather than of only looking at whether we want to overweight/underweight equities, our Investment Committee is now focused on the amount of risk we are taking with each model.  Our first step in constructing portfolios is to decide if we want to be overweight, equal weight, or under-weight risk compared to our benchmarks.  Currently all of our portfolios are equal weight to risk.  We then decide which areas of the market appear to be the most likely to out-perform and will use our “risk budget” to select excellent managers in those asset classes.  Our goal has been to take on risk where the upside potential is most attractive. Currently, in most models, we have used our risk budget to increase exposure to Value, Small/Mid Cap Companies, and Alternative funds that can go Long or Short equities depending on how the manager feels the market will perform.  Given this approach, we are comfortable that we have positioned our portfolios well for the current market conditions and believe that this approach will help you reach your long-term goals. As always, we are here to address your questions or concerns. 

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.

Beyond the Trades Interview
Shana Sissel, CAIA

Join the Spotlight Asset Group Newsletter

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An Update Regarding Market Volatility

Recent market volatility during the month of May has made many investors nervous and for good reason. The market is in the midst of a change in momentum and the shift has been sudden. First, it’s important to note, the U.S. economy is recovering rapidly from the COVID-19 pandemic. Many different factors are at play in the recovery: the rollout of vaccines, the lifting of restrictions, loose monetary policy, and a massive increase in government spending. The problem is that the massive government “stimulus” checks have put the economy in a strange position, where retail sales are far above where they would be if COVID had never happened, even as the production side of the economy remains relatively weak. Pandemic unemployment benefits, paired with lack of childcare options has resulted in a strange dynamic for employment, plenty of jobs and not enough job seekers. Add to that the inflationary effect of the economic recovery and suddenly we find ourselves with very unusual market dynamics.

One of the questions we are most frequently asked is about the rotation from growth to value. Growth stocks tend to be companies that are smaller or are in more volatile sectors of the market like technology.  Tesla would be a good example of a growth company.  Value companies are usually larger and are more likely to be staples of the economy.  Walmart would be a good example of a value stock.  This rotation from growth to value which began in October, is not an unusual market event. Growth had been outperforming value for the better part of a decade, as economic conditions strongly favored growth stocks (interest rates trending lower, inflation at historically low levels, slow and steady economic growth). The chart below illustrates the relationship between growth and value over time.

An Update Regarding Market Volatility 1
Source: MPI Stylus

Typically, value does best in the recovery stage of a recession when interest rates are moving upwards and when inflation is rising. Value sectors like energy, materials and financials thrive under those conditions.  

At Spotlight we anticipated this shift and began positioning our portfolios accordingly earlier this year. Specifically, we added more active managers to our investments over the last several months. We believe active management is more successful when the market is more volatile, and we feel we have had success in selecting high quality active managers. The table shown below illustrates how well our active managers have performed in the last 12 months. All our active equity managers are outperforming the S&P 500. This is even more apparent in the fixed income space, as all four of our fixed income strategies are actively managed, and all four are handily beating the Barclays U.S. Aggregate benchmark. 

An Update Regarding Market Volatility 2

Additionally, over the past year we have implemented a risk budgeting approach to our portfolio construction.  Rather than of only looking at whether we want to overweight/underweight equities, our Investment Committee is now focused on the amount of risk we are taking with each model.  Our first step in constructing portfolios is to decide if we want to be overweight, equal weight, or under-weight risk compared to our benchmarks.  Currently all of our portfolios are equal weight to risk.  We then decide which areas of the market appear to be the most likely to out-perform and will use our “risk budget” to select excellent managers in those asset classes.  Our goal has been to take on risk where the upside potential is most attractive. Currently, in most models, we have used our risk budget to increase exposure to Value, Small/Mid Cap Companies, and Alternative funds that can go Long or Short equities depending on how the manager feels the market will perform.  Given this approach, we are comfortable that we have positioned our portfolios well for the current market conditions and believe that this approach will help you reach your long-term goals. As always, we are here to address your questions or concerns. 

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.

Beyond the Trades Interview
Shana Sissel, CAIA

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Market Commentary

Market Commentary

Market Commentary 5

2021 is off to a rocky start as equity markets declined across the board. The S&P 500 Index fell -1.01%. The world was captivated by the trading frenzy over heavily shorted stocks such as GameStop (GME) and AMC Entertainment Holdings (AMC), which drove volatility in equities to the highest levels since October. The lone bright spot was small cap stocks which continued their run of outperformance, ending the month up +5.03%.

To say that month was crazy for the markets seems like a bit of an understatement. Rampant speculation being driven by anonymous investors on a Reddit chat board called “Wall Street Bets” captivated the headlines, as what seemed to be a David versus Goliath scenario played out in one of the most public short squeezes seen in years. As retail investors jumped on board in the hopes of beating the big hedge funds at their own game, hedge funds seemed to be on their heels, cutting bets by decreasing their long equity positions to cover short bets that had turned against them, causing downward pressure across the equity markets. The drama heightened as retail brokerage firm Robinhood suspended buying activity in the targeted stocks and closed out many investors existing positions. The sensational headlines caught the eye of the regulators and politicians who immediately demanded answers and solutions to protect retail investors, despite their clear willingness to participate in the speculation. 

The challenge in moments of frenzy is being able to look beyond the noise and focus on the broader picture. Very little attention has been paid to the strong earnings that have been reported thus far. According to FactSet with 37% of the companies in the S&P 500 reporting actual results, 82% of S&P 500 companies have reported a positive EPS surprise and 76% have reported a positive revenue surprise. If 82% is the final percentage, it will mark the second-highest percentage of S&P 500 companies reporting a positive EPS surprise since FactSet began tracking this metric in 2008. Improving economic data and the increasing pace of vaccinations in the U.S. continue to support rising equity prices in the near term. While the headlines focus on the frenzy, smart investors have an opportunity to buy quality companies at an attractive price, setting themselves up to take advantage of the explosion of pent-up demand that is anticipated in the second half of the year. While it is easy to get caught up in the excitement, I would not allow the temptation to earn a quick buck in the battle against the shorts distract from the more lucrative opportunity that such a frenzy presents smart investors who are focused on the long-term. 

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.

Beyond the Trades Interview
Shana Sissel, CAIA

Join the Spotlight Asset Group Newsletter

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Market Commentary

Market Commentary 5

2021 is off to a rocky start as equity markets declined across the board. The S&P 500 Index fell -1.01%. The world was captivated by the trading frenzy over heavily shorted stocks such as GameStop (GME) and AMC Entertainment Holdings (AMC), which drove volatility in equities to the highest levels since October. The lone bright spot was small cap stocks which continued their run of outperformance, ending the month up +5.03%.

To say that month was crazy for the markets seems like a bit of an understatement. Rampant speculation being driven by anonymous investors on a Reddit chat board called “Wall Street Bets” captivated the headlines, as what seemed to be a David versus Goliath scenario played out in one of the most public short squeezes seen in years. As retail investors jumped on board in the hopes of beating the big hedge funds at their own game, hedge funds seemed to be on their heels, cutting bets by decreasing their long equity positions to cover short bets that had turned against them, causing downward pressure across the equity markets. The drama heightened as retail brokerage firm Robinhood suspended buying activity in the targeted stocks and closed out many investors existing positions. The sensational headlines caught the eye of the regulators and politicians who immediately demanded answers and solutions to protect retail investors, despite their clear willingness to participate in the speculation. 

The challenge in moments of frenzy is being able to look beyond the noise and focus on the broader picture. Very little attention has been paid to the strong earnings that have been reported thus far. According to FactSet with 37% of the companies in the S&P 500 reporting actual results, 82% of S&P 500 companies have reported a positive EPS surprise and 76% have reported a positive revenue surprise. If 82% is the final percentage, it will mark the second-highest percentage of S&P 500 companies reporting a positive EPS surprise since FactSet began tracking this metric in 2008. Improving economic data and the increasing pace of vaccinations in the U.S. continue to support rising equity prices in the near term. While the headlines focus on the frenzy, smart investors have an opportunity to buy quality companies at an attractive price, setting themselves up to take advantage of the explosion of pent-up demand that is anticipated in the second half of the year. While it is easy to get caught up in the excitement, I would not allow the temptation to earn a quick buck in the battle against the shorts distract from the more lucrative opportunity that such a frenzy presents smart investors who are focused on the long-term. 

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.

Beyond the Trades Interview
Shana Sissel, CAIA

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Shana Sissel Guest Blog with All About Alpha

Shana Sissel Guest Blog with All About Alpha

Read Spotlight Asset Groups Chief Investment Officer Shana Sissel’s blog post on All About Alpha.

For almost two decades I have worked in roles that were heavily focused on investment manager due diligence across asset classes and legal structures. I began my career in due diligence-focused on the world of hedge funds. Hedge funds, in particular, are often viewed with a more critical eye than their more regulated counterparts. It’s often taken for granted that if a structure is more highly regulated than it must have lower risk. That couldn’t be further from the truth.

Click here to read the entire article.

Join the Spotlight Asset Group Newsletter

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Shana Sissel Guest Blog with All About Alpha

Read Spotlight Asset Groups Chief Investment Officer Shana Sissel’s blog post on All About Alpha.

For almost two decades I have worked in roles that were heavily focused on investment manager due diligence across asset classes and legal structures. I began my career in due diligence-focused on the world of hedge funds. Hedge funds, in particular, are often viewed with a more critical eye than their more regulated counterparts. It’s often taken for granted that if a structure is more highly regulated than it must have lower risk. That couldn’t be further from the truth.

Click here to read the entire article.

Recent Posts

Market Commentary

Market Commentary

Market Commentary 7

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%. 

Market Commentary 8

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.

Market Commentary 9

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.

Market Commentary 10

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.

Beyond the Trades Interview
Shana Sissel, CAIA

Join the Spotlight Asset Group Newsletter

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Market Commentary

Market Commentary 7

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 benefited 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%. 

Market Commentary 8

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.

Market Commentary 9

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.

Market Commentary 10

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.

Beyond the Trades Interview
Shana Sissel, CAIA

Recent Posts

Market Commentary

Market Commentary

Market Commentary 15

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.

Market Commentary 16
Source: Pantheon Macro U.S. Monitor, September 25, 2020
Market Commentary 17
Source: Pantheon Macro U.S. Monitor, September 25, 2020

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.

Beyond the Trades Interview
Shana Sissel, CAIA

Join the Spotlight Asset Group Newsletter

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Market Commentary

Market Commentary 15

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.

Market Commentary 16
Source: Pantheon Macro U.S. Monitor, September 25, 2020
Market Commentary 17
Source: Pantheon Macro U.S. Monitor, September 25, 2020

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.

Beyond the Trades Interview
Shana Sissel, CAIA

Recent Posts

Market Commentary

Market Commentary

Market Commentary 21

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.

Market Commentary 22

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.

Market Commentary 23

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.

Beyond the Trades Interview
Shana Sissel, CAIA

Join the Spotlight Asset Group Newsletter

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Market Commentary

Market Commentary 21

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.

Market Commentary 22

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. 

Market Commentary 23

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.

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Shana Sissel, CAIA

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