Market Condition: The market is in a confirmed uptrend. The Nasdaq composite index continues to trend above its 10-20 day averages, at times pulling back , and quickly rebounding. The S&P 500 is finally trading positive for the year overcoming the 3230 level. Distribution (days of heavy institutional selling) are at a minimum. Another hurdle for the S&P 500 might be the 3993 level the February highs. Despite this long uptrend since the March lows, the indexes are trading more orderly, a very bullish sign as volatility subsides. Furthermore, we are seeing breadth expanding as the Dow Jones Industrials, the Dow Transports , and the Russell 2000 small cap index all which have been lagging starting to participate in this rally.
The stock market and the economy are practicing social distancing. On one side of the street, we have a weak economy, where rising COVID-19 cases are putting a recovery in jeopardy by hampering reopening efforts. Across the way is the U.S. equity market, which continued to rally in July with the support of the Federal Reserve’s fiscal stimulus. These factors have kept the two at more than arm’s length for months.
Earnings season, which is tailing off, provided a clearer picture of how hard efforts to combat the coronavirus have hit corporate America and the economy. Limited guidance and bleak expectations set a low bar for most companies in the second quarter—83% of companies have done better than expected. Before firing the confetti, keep in mind that earnings are 34% lower than they were a year ago.
If that wasn’t bad enough, the initial estimate of second-quarter GDP (a measure of the size of our economy) fell at a 32.9% annual pace. That’s a striking number—the worst quarter since at least the Great Depression—but perspective is warranted. It’s an annualized number, so the economy did not shrink by a third between April and June. Rather, GDP fell by 9.5% from the previous quarter, still a terrible result representing a loss of about $1.8 trillion in economic activity.
There’s no getting around the fact that these are really bad, record-crushing numbers, but the stock market is a forward-looking indicator, and it has moved higher on the prospect that the economy has bottomed out.
The S&P 500 index, a broad measure of large U.S. companies, returned 5.6% in July (including dividends) and closed the month only 3.4% below its February all-time price high. Small- and mid-cap stocks also gained but underperformed large-caps for the month.
Ten of 11 U.S. stock market sectors rose more than 3% in July—energy was the exception. Consumer discretionary, utilities and materials topped the performance leaderboard. Financials gained, albeit less than the broader market, after big banks exhibited relative strength to kick off earnings season. Large-cap technology stocks capped a positive month with stellar earnings, exceeding lofty expectations.
International stocks climbed alongside their U.S. counterparts in July. The MSCI EAFE index—a broad measure of foreign developed stocks—returned 2.3% for the month. Emerging market stocks outperformed for the second month in a row, as the MSCI Emerging Markets index gained 7.4% in July.
Falling interest rates meant gains for most fixed-income sectors. The yield on the U.S. 10-year Treasury note dropped 13 basis points to close the month at 0.53%, while the Bloomberg Barclays U.S. Treasury index gained 1.1%. The broad Bloomberg Barclays U.S. Aggregate Bond index—a measure of investment-grade bonds, including Treasurys and corporate bonds—gained 1.5% for the month.
Gold posted strong gains, reflecting demand for a safe haven in times of economic uncertainty.
Widely held large cap institutional stocks like Apple (AAPL), Facebook (FB), Alphabet (GOOGL), Microsoft (MSFT), Adobe (ADBE), Netflix (NFLX), Visa (V), Advanced Micro Devices (AMD) , Nvidia (NVDA) , and others continue to act well indicating a demand for shares.
Vulnerable hot growth stocks (stocks that quickly risen more than 100%) finally had their days of reckoning this week as many fell sharply stocks like Fastly (FSLY), Datadog (DDOG), Coupa (COUP), Twilio (TWLO), Dynatrace (DT), and many others. This is a healthy consolidation as many of these may go on to form new bases while the run may be over for others all to be seen. Sharp sell-offs like these might spread to other stocks something to watch for.
It wasn’t all about searching for safety, though. Monetary stimulus continues to support credit markets, and even higher-risk corporate “junk” bonds once again posted strong gains, as the Bloomberg Barclays U.S. High Yield index gained 4.7% in July, finally reaching positive territory for the year.
It is beyond this scope of this report to debate the lockdowns, destruction of the economy, or as previously quoted, “the most expensive self-inflicted injury in the history of mankind.” It will take years to sort out a pandemic that had serious consequences for some unfortunate souls , which then turn into a politicized event. Since it is beyond the scope of this report the reader is encouraged to read https://swprs.org/a-swiss-doctor-on-covid-19/#latest one of the best summaries of the facts, and charts related to Covid-19.
Summary:
We are a long way away from a complete economic recovery. However we are recovering and the recession is over. Data will remain volatile, deaths and cases seemed to have peaked in “second wave” states . At this time no one really knows how this will all play out but what is certain that we are better prepared at identifying serious cases and treatments have gotten much better and streamlined. The forward discounting mechanism of the market must know this, and this perhaps explains the ongoing strong uptrend that we are witnessing today. Until this changes we can only conclude that for now the market continues to trend upward. No doubt the market one day will overshoot to the upside, (as it overshoots to the downside). Pullbacks and corrections would be normal at this time after a pretty good run. In the meantime well wishes for all.
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