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.

The month of June was the story of risk-on and risk-off. The alarming rise of coronavirus cases in the United States drove market volatility higher and the headlines helped influence investor risk appetite throughout the month.

The S&P 500 returned 1.99% during the month. Early month declines were followed by mid-month strength as economic indicators still show a significant rebound in the global economy. Small cap stocks outperformed their larger cap peers and growth, led by technology names, bested value. Non-US developed markets and emerging markets were strong during the month as the spread of the virus appears well contained overseas.  

The bifurcated market has been a key characteristic since the sell-off in March. While the Federal Reserve seems quite happy to continue to prop up the bond markets, the equity markets have teetered between risk on and risk off on a daily basis. The market seemed content to look past the rise in new COVID-19 cases and focus more broadly on the rebounding U.S. economy. While many states have put reopening plans on pause, or even reinstated lockdowns in certain areas, the overall trend towards reopening was enough to bolster June non-farm payrolls by 4.8 million, well above the consensus expectations of an increase of 3 million jobs.

In my opinion, the likelihood that states will reinstitute broad lockdowns is low; however, I do think we could see many states dial back their reopening plans or put existing plans on hold for the foreseeable future. The reopening of schools is now a growing debate that is sure to impact the ability of many parents to return to work on a full-time basis. This may mean the strength of any economic rebound will be muted. Initial economic indicators in May and June showed significant rebounding in the global economy, but it is unlikely to maintain that momentum as it is now clear that the fight against the virus is not finished. The developments are quite fluid, and things could certainly change rapidly as we enter July and August. I believe this will cause the volatility of equities to remain elevated and the shift between risk on and risk off will be persistent as news headlines continue to drive market sentiment.

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 positive equity momentum that began in April continued into the month of May. Improving economic data appears to support the thesis that the worst of the economic devastation from the coronavirus lockdowns is behind us. In fact, the most recent data suggests the economic recovery may be much faster than anticipated. This good news, paired with an accommodative U.S. Federal Reserve, has caused a rebound in investors’ appetite for risk. 

The S&P 500 returned 4.76% during the month, building upon the strength of April. For the second month in a row, mid-cap stocks outperformed both large-caps and small-caps. Non-US developed markets performed in-line with the S&P 500 and both handily outperformed emerging markets. Risk continued to be rewarded in fixed income, with another strong month for high yield bonds. 

Across the United States more and more states have begun the reopening process and going into the last weekend of May there appeared plenty of reasons to be optimistic. The most encouraging piece of economic news during the week was the meaningful decline of continuing unemployment claims, the first drop since February. Continued claims fell by 3.86 million, bringing the total number of claims to 21.05 million. This is an important data point as it shows that the gradual reopening of state economies is helping to bring back jobs, albeit gradually. Another positive data point was improving TSA passenger numbers, which rose to 268,867 passengers, up 39% from two weeks ago. While this number is still pitiful in comparison to normal daily travel numbers in the millions, it is yet another sign that Americans are eager to return to some sense of normalcy. 

What seems to be true is that the fastest stock market decline in history has been followed by the fastest recovery on record. While many market prognosticators, including myself, felt this downturn would be prolonged and the impact of the lockdowns on the economy would result in a U-shaped recovery, it is quite evident that this was a V-Shaped recovery all along. The recession that started in March is the sharpest downturn we have seen since the Great Depression.  As it turns out, it was also the shortest.

The outlook for stocks looks promising from here. While I anticipate corporate earnings to be down substantially in the second quarter, it is unlikely that it will be a prolonged dip. As we know, the stock market is forward looking anyway, so I do not expect the bad news to have much impact on the market’s upward trajectory. That said, nothing about 2020 has been predictable and my crystal ball is a bit foggy these days. Our goal is to position our portfolios to “expect the unexpected”, staying cautiously optimistic, while also maintaining appropriate downside protection.

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 old saying goes “April Showers bring May Flowers” and while that might certainly be true for the weather here in Northern Illinois, I’m not convinced it will apply to the stock market, as the economic impact of the global lockdown starts to affect earnings reports in the next few months.

After an abysmal March, April brought positive returns across all major asset classes. The S&P 500 returned 12.82% during the month, recovering significantly from the lows of a month ago. Mid-cap stocks bested both large-caps and small-caps. U.S. markets sizably outperformed their non-U.S. counterparts, and emerging markets beat developed markets by a wide margin. April proved to be a risk-on market with high yield bonds handily outperforming investment grade.

Largely positive April returns are certainly not reflective of the unprecedented economic crisis we are experiencing. The main thought on investors’ minds is whether the market will retest the March lows. Personally, I believe that to be a likely scenario. As states work on their plans to reopen, any indications that the lockdowns will continue through the summer months will not be viewed favorably by the markets. This will be especially true as April economic data offers investors a glimpse into the economic damage being done. Markets like clarity and if a clearer picture does not emerge for how the reopening will unfold, I expect the markets will continue to be volatile.

The next question seems to be is are the markets fairly-valued. Down about 12% from all-time highs does not seem to suggest they are. To date, 55% of S&P 500 companies have reported first quarter earnings. As more companies release their earnings, second quarter guidance has maintained a somber tone. Per FactSet’s recently released Earnings Insight report ¹, analyst consensus estimates for S&P 500 second quarter earnings fell 28.4%, from $36.94 to $26.46. This marked the largest decline in the quarterly EPS estimate over the first month of a quarter since FactSet began tracking this data in the first quarter 2002. The market will need to recalibrate expectations currently reflected in stock prices. This again supports the thesis that continued downside risk remains in equity markets.

The counter argument, of course, is that the Federal Reserve has taken aggressive action in an attempt to buoy the markets. This “reflation trade”, which seeks to reduce risk premiums and reflate risk assets, appears to be having the desired effect. This certainly helps limit the floor for equities, but I still believe downside risk remains.

The counter argument, of course, is that the Federal Reserve has taken aggressive action in an attempt to buoy the markets. This “reflation trade”, which seeks to reduce risk premiums and reflate risk assets, appears to be having the desired effect. This certainly helps limit the floor for equities, but I still believe downside risk remains.

The good news is that the very worst of the economic hit from the COVID-19 driven lockdowns is likely behind us. As more and more states begin to relax restrictions on their local economies, gradual improvements are likely to be seen. This process will be slow and deliberate, but nonetheless a step in the right direction.

¹ FACTSET Earnings Insight May 1, 2020 https://www.factset.com/earningsinsight

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.