We Are Slowly Making Money

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

Equity markets are generally flat to lower in the Summer, but this year has been a soft surprise. After a quick slap in June, equities have been slowly but surely working their way higher. And for good reasons. Corporate earnings have been positive. Housing has totally rebounded. Interest rates are solidly lower and projected to remain so for the foreseeable future. Inflation in non-evident. COVID-19 news is old news and the trends are positive. School is back in session and it appears that protective measures are working so far. We are rounding the final turn on the election with no surprises. These are all positives for equities.

Equities have narrowed their leadership with a focus on giant cap technology and internet stocks. The Dow Jones Internet Index is now up +36.88% YTD, while the S&P Composite 1500 Information Technology Sector Index is up +29.77%. Also strong is the S&P Composite 1500 Consumer Discretionary Sector Index, up +23.80%. The S&P 1500 Health Care Sector Index is up a respectable +6.30% YTD, and from there the numbers start to fade. The Dow Jones Industrial Average is up +0.57% while the S&P 1500 Industrials Sector is down -3.55%. The Dow Jones US Real Estate Index is down -10.21% and the S&P Composite 1500 Financials Sector is down -18.25%. Still bringing up the rear is the energy sector, with the S&P 1500 Energy Sector Index down -38.06% YTD.  Further evidence of the focus on large and giant cap equities can be seen in the S&P Capitalization Indices.The S&P 500 Large Cap Index is up +7.94% YTD. The S&P MidCap 400 is down -5.13% YTD, with the S&P 600 Small Cap Index down -9.95% for the year.

The Bloomberg Barclays U.S. Aggregate Bond Index is now up +6.94% YTD, with an effective yield of only 1.15%. This is a reflection of the ongoing demand for high quality, positive yielding fixed income securities. Remember that most of Europe is in a negative yield interest rate environment. The U.S. bond market is one of the most attractive in the world, even as the U.S. Dollar fluctuates lower. The Bloomberg Barclays U.S. Corporate High Yield Bond Index is now back in positive territory YTD, up +1.35%. This puts all of the U.S. bond indexes that we follow in the positive for the year.

The news media has slowly shifted their attention from COVID-19 to the national elections. The Democratic National Convention went off with relatively no surprises. The Republican National Convention is wrapping up.  We know who the players are and we know their stories. Financial markets historically perform quite well in this type of environment, regardless of whether the incumbent or the challenger prevails in the Presidential race.  The Congressional races will hold more potential impact, particularly in the Senate, which is now projected to remain in Republican control. A surprise majority to the Democrats will shift the playing field with respects to taxes, both corporate and individual. But rarely do voters vote against their own pocketbook.

Politics aside, the primary driver is still the economy, which is projected to give us record positive numbers the rest of 2020 after the record negative first quarter numbers.  An indication of these numbers is in new Single-Family Home Sales, which increased 13.9% in July, and are up 36.3% from a year ago. This is a third consecutive monthly gain, and the fastest pace since 2006. New home sales are now 16.4% higher than the January high before COVID-19 hit the U.S. economy. Buyers’ preferences appear to be shifting away from dense urban housing towards the suburbs. Sales rose in the Midwest, South and West, but fell in the Northeast. In the past twelve months prices were up the most in Phoenix and up the least in Chicago.  The world’s greatest consumers are back!

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

© 2020 Edward D. Foy

Sources: Bloomberg.com, Marketwatch.com, StockCharts.com, Morningstar.