The Week in Review: August 24, 2020
The S&P 500 Eclipses Prior High
The unemployment rate is above 10% (U.S. Bureau of Labor Statistics). Though declining, layoffs remain at elevated levels (Dept. of Labor) amid the lingering pain caused by the COVID recession.
Yet headlines of new highs for the major indexes would suggest the economy is doing just fine. It’s not.
Closing at a fresh record on Friday, the NASDAQ Composite is up an impressive 26% year-to-date (MarketWatch), while the broader-based S&P 500 Index eclipsed its prior February 19 high of 3,386.15 on Tuesday. It closed at a new record of 3,397.16 on Friday (MarketWatch).
Yet industry performance has been uneven. Strong gains in tech, which so far has been more insulated from the pandemic and recession, have led the NASDAQ higher. But economic uncertainty has kept pressure on economically sensitive cyclicals (StockCharts).
The Dow Jones Industrial Average1 (DJIA) has not taken out its high. Yet, since bottoming, it just had its best 100-day gain (up 50%) since 1933 (Barron’s—market bottom of March 23).
It’s difficult to quantify with exact certainty why the major indexes have had such a robust rebound. But let’s consider some of the factors:
Fed stimulus and an open-ended commitment of additional stimulus
Extraordinarily low-interest rates
Fed guidance that low rates will continue for an extended period
An improving economy
A rollover in new daily COVID cases (Johns Hopkins)
A smaller-than-expected drop in Q2 S&P 500 profits (Refinitiv)
Talk of a vaccine
Investors may simply be looking past 2020
New fiscal stimulus has run into roadblocks on Capitol Hill, but the inability to find common ground has yet to derail stocks.
We also recognize that risks never completely abate. A quick survey of the landscape reveals that pitfalls aren’t hard to find.
A new stimulus plan may not come to fruition, the sharp economic rebound appears to be slowing, a second COVID wave in the fall is a risk, and tensions between the U.S. and China are lingering.
In the minutes released from the late July Fed meeting, officials agreed that “the ongoing public health crisis would weigh heavily on economic activity, employment, and inflation in the near term and posed considerable risks to the economic outlook over the medium term.”
Given the massive amount of uncertainty, the adage that bull markets climb a wall of worry seems to describe today’s environment.
While today’s highs may create market vulnerabilities, recent market action suggests the economic recovery is on the right track, even if month-to-month activity is uneven.
If you have any questions or concerns, feel free to reach out to me, Will, or Tyler.
Two for the Road
If you adjust for inflation, gold still has to climb to $2,800 per ounce to surpass 1980 levels. —Marketwatch, August 6, 2020
“Twenty years from now you will be more disappointed by the things you didn’t do than by the things you did.” —Mark Twain
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