What to Make of Recent Market Performance
by Zach Marsh on Sep 25, 2020
For the week, the S&P 500 was down a little over 1%, which brings the month-to-date downturn to a touch over 6.5%. The stock market, which has been led higher over the last six months by technology stocks, has been dragged down by the higher flying tech names. Amazon, Facebook, Apple, and Google parent Alphabet are all down an average of 13.7% this month. Complicating matters for the large-cap index is the fact that we have not really seen a rotation into broader names. Traditional value stocks like Exxon Mobil, Johnson and Johnson, and JP Morgan have all fallen this month, albeit to a lesser degree. Last week I pointed out the significant outperformance of the Nasdaq 100 vs. the small-cap Russell 2000 index, which has reached levels approaching the tech bubble era of the late ‘90s.
Further evidence of the narrowness of this years US stock performance can be seen by the outperformance of the cap-weighted S&P 500 index vs the S&P 500 equal-weighted index. The cap-weighted index performance is skewed towards the outsized weightings of the aforementioned big tech stocks.
While the more broadly followed cap-weighted index is up fractionally year-to-date, the equal-weighted index is down over 7%. If the mortality rate of coronavirus has discriminated against one segment of the population, the pandemic has also discriminated between winners and losers.
The challenges this month have not been born by the stock market alone. Diversified portfolios have also not been immune to the pullback in prices. The performance across a diversified array of assets has been fairly correlated since the pandemic hit. Gold and US Treasury bonds have held up, and even continued to ride higher with broad market stock indices from March through August. Unfortunately, this correlation has largely remained intact this month, but with all assets falling in synchronicity. Gold, which had been one of the best performing assets all year, has fallen over 5% this month. It now sits roughly 10% below its 52 week high set in early August. Gold’s weakness can be laid at the feet of a recent bounce in the US dollar, which could prove to be short-lived should one party sweep the election in November. My belief is that we will continue to see larger government deficits should either party sweep the elections. This prospect should/could provide additional tailwinds for gold.
Portfolio diversification traditionally proves its value during periods of low asset correlation. A diversified approach is the best way to protect your money from unknown future outcomes, but this approach can prove sub-optimal during equity bull markets. Diversification can also be harder to stick with because its real benefit is typically experienced during sub-optimal environments, such as bear markets and recessions.
I continue to maintain that the “bear market” we experienced in February and March was a bear market in name only. While the percentage drop was significant, the time spent underwater for the stock market was, in fact, shorter than many much smaller corrections. Bear market drawdowns are tough because they erode not only equity but time. It remains to be seen if we are on the verge of entering a more prolonged period of stock market underperformance. This week’s stock market performance, while negative, offered glimmers of hope that the market may be forming a new base well above its prior base level set in early July. Up trends are marked by a successive pattern of higher highs and higher lows, for now the current up trend which began in March remains in place today.
Thanks for reading,
Zach and Dave
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