The Dog Days Of Summer

“Good investors gather information, put that information into current and historical context, then make sound decisions.”

July was kinder and gentler to equity markets than was June. While equity markets are higher, the path of least resistance is up, and we have not seen the dramatic pullbacks that punctuated the month of June. Negative news events seemed to wear a bit thin and market reactions were more restrained. This “inaction” resulted in marginally less volatility and allowed equities to drift towards the top of their trading range. At this writing, the S&P 500 Index is at 3239, or 4.75% away from the all-time high watermark of 3393 set in February of this year. This is certainly within striking distance should a favorable catalyst surface.

Leadership continues to reside in the large cap stocks. The S&P 500 Index is now up +0.62% YTD, while the S&P Mid Cap 400 Index is down -9.46% YTD and the S&P Small Cap 600 Index is down -15.85%. Internet stocks are still the most-favored sector, with the S&P Composite 1500 Information Technology Sector Index up +14.48%. The reopening of the economy is being reflected in consumer discretionary stocks with the S&P Composite 1500 Consumer Discretionary Sector up +12.41% YTD. Healthcare has also climbed into the plus column. The S&P Composite 1500 Health Care Sector is now up +4.35%.

There are still several soft spots for equities. The Dow Jones Industrial Average is down -6.00%, the Dow Jones Transportation Average is down -9.95%, the Dow Jones Utilities Average is down -4.54%, and the Dow Jones U.S. Real Estate Index is down -14.15%. More heavily impacted are the financial and energy sectors. The S&P Composite 1500 Financials Sector Index is down -20.53% YTD and the S&P Composite 1500 Energy Sector Index is down -36.63%. There is still considerable room for improvement should market breadth expand beyond internet, consumer discretionary and healthcare.

Bond markets are still lumbering higher, in spite of record low interest rates. Corporate and governmentborrowers are taking full advantage of the almost unbelievable bargains in the lending markets. Consider these numbers for a moment. The Broad Market Bloomberg Barclays U.S. Government/Credit Index as of July 24th had an effective yield of 1.08%, with the U.S. Aggregate Bond Index yielding 1.15%. Mortgage rates are also at rock-bottom levels, spurring both new construction and refinancing opportunities. Austria recently issued bonds that mature in 100 years paying 0.88%. The demand for these bonds was nine times the size of the offering!

When the economy opened up, positive COVID-19 numbers increased. It can be argued that pending the development of an effective vaccine, the only eventual pathway for this pandemic will be in the form of herd immunity. The economic impact of the closures and subsequent reopening is now running headlong into the pressures of the impending school year. This opens another chapter of the paradigm shift as remote learning joins the conundrum of the remote workplace. It is certain that many failures will accompany the lessons that are learned while we continue to explore these uncharted waters.        

And once again, it bears mentioning that we are now only fourteen weeks away from Election Day. The biggest fireworks are still coming. Historically, equity markets have benefited during election years regardless of who wins, especially during an economic expansion. 2020’s economic pullback and subsequent recovery should be dramatically enhanced by the COVID-19 tsunami of activity, even with the prospect of false-starts and restarts. Remember that stock markets look through current events, while bond markets get hypnotized by current events. Both types of financial markets are currently in their own respective sweet spots. The build up for the fourth quarter and for 2021 is already underway.

Edward D. Foy, Manager, SELECTOR® Money Management, Chief Investment Officer, Foy Financial Services, Inc.