Hero image

August 11 2020 Market Update

By on Aug 11 in Economics, Finance, Financial advisors, Market Update, Worth sharing

Markets Climb Higher Amid Economic Dislocation

Domestic stocks continued to charge higher in July, despite record low economic output and an uncertain outlook. The S&P 500 shrugged off regional surges in coronavirus cases to rise 5.5 percent for the month, its best July since 2010.[1]

That said, the Commerce Department’s initial estimate of second quarter GDP showed that U.S. economic activity plunged 32.9 percent, marking the worst GDP contraction on record. However, investors chose to look ahead, and better-than-expected early company earnings reports also lifted market sentiment.[2]

In light of this, many investors are asking: how healthy is the economy and what lies ahead in the coming months?

The economy this summer

Given that two-thirds of US economic output is driven by consumer spending, the resilience of consumer spending will likely be a significant factor in the speed of a recovery.

Consumer spending rose 5.6 percent in June. This followed May’s record increase of 8.5 percent. Although the spending rebound bodes well for third quarter consumption, declining personal income amid the expiration or reduction of extended unemployment benefits is a key concern for market observers.[3] Depending on the passage of additional support for unemployed workers and the impact of COVID-19 on local economies, we could see a reversal in consumer spending over the coming months.

Meanwhile, there have been signs that the manufacturing sector may be on more solid footing. The Institute for Supply Management’s July Manufacturing Purchasing Manager’s Index, a gauge of manufacturing activity, was 54.2, the second straight month of expansion. Similarly, the July Purchasing Manager’s Index for services, at 58.1, was also encouraging.[4] A reading above 50 implies an expansion in activity, while readings below 50 indicate a contraction.

At the surface, these figures appear strong, but investors should also take note of the ISM Employment Index, which slipped 1 percent in July, to 42.1. This was the fifth straight month the index sat in contraction territory.

Despite encouraging signals elsewhere, this may imply that there is trouble ahead given the importance of employment on personal income and consumer spending.[5]

Implications for investors

So, how do we reconcile the dislocation between U.S. economic output and the continued rise in the markets?

We have covered this in detail before, but at its simplest, one could argue that the market has glazed over the disconnect between a recessionary second quarter and surging stock prices because investors see a light at the end of the tunnel. Many investors have high hopes for a “V” shaped recovery in the second half of the year and early 2021.[6]

However, that optimism could fade if we see continued negative developments in the spread of COVID-19, as we did in July, or if economic output doesn’t rebound as quickly as expected.[7] Ongoing fiscal and monetary stimulus will be instrumental in helping us cross the bridge over the abyss. Any glitches could send us rapidly falling backwards.

The rise in equities has been comforting to many investors, but the truth is we remain in a highly uncertain economic environment. While markets have been good to investors despite the economic and health issues facing the US, it’s important to remember that these are unprecedented times. We cannot stress enough the importance of a prudent, diversified, and diligently managed investment strategy.

It’s also important to note that this rally has not been broad-based. Economically sensitive sectors like energy and financials have lagged badly, while companies benefiting from the “stay-at-home” theme have thrived. Trends in online shopping and remote workforce deployment have propelled technology-related companies to fresh all-time highs.

For example, at the end of July, the technology sector comprised 27.5 percent of the S&P 500 index. This is more than the weighting of the smallest six sectors combined. The top five constituents by weight are all technology stocks (Apple, Microsoft, Amazon, Facebook, and Alphabet) and have grown to represent over 20 percent of the entire index.[8]

As technology is one of the most volatile sectors, we believe the index itself could become more susceptible to volatility – and in some cases less-aligned with an individual’s goals. Of course, the COVID-19 situation remains fluid and we will continue to monitor developments as they impact the economy and capital markets.

We encourage you to reach out to us with any questions, comments, concerns, or just to check in. Wishing you a safe and healthy end of summer.

JSF Financial

Securities are offered through Mid Atlantic Capital Corporation (“MACC”) a registered broker dealer, Member FINRA/SIPC.

Investment advice is offered through JSF Financial, LLC, which is not a subsidiary or control affiliate of MACC.

Confidentiality Note: This email communication including all attachments transmitted with it may contain confidential information intended solely for the use of the addressee. If the reader or recipient of this communication is not the intended recipient, or you believe that you have received this communication in error, please notify the sender immediately by return email or by telephone at (323) 866-0833 and PROMPTLY delete this email including all attachments without reading them or saving them in any manner. The unauthorized use, dissemination, distribution, or reproduction of this email, including attachments, is strictly prohibited and may be unlawful.

The information expressed herein are those of JSF Financial, LLC, it does not necessarily reflect the views of Mid Atlantic Capital Corporation (MACC). Neither JSF Financial LLC nor MACC gives tax or legal advice.  All opinions are subject to change without notice.  Neither the information provided, nor any opinion expressed constitutes a solicitation or recommendation for the purchase or sale of any security.  Investing involves risk, including possible loss of principal.  Indexes are unmanaged and cannot be invested in directly.

Historical data shown represents past performance and does not guarantee comparable future results.  The information and statistical data contained herein were obtained from sources believed to be reliable but in no way are guaranteed by JSF Financial, LLC or MACC as to accuracy or completeness. The information provided is not intended to be a complete analysis of every material fact respecting any strategy.  The examples presented do not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy. Diversification does not ensure a profit or guarantee against loss. Carefully consider the investment objectives, risks, charges and expenses of the trades referenced in this material before investing.

Asset Allocation and Diversification do not guarantee a profit or protect against a loss.

The Bloomberg Barclays U.S. Aggregate Bond Index measures the investment-grade U.S. dollar-denominated, fixed-rate taxable bond market and includes Treasury securities, government-related and corporate securities, mortgage-backed securities, asset-backed securities and commercial mortgage-backed securities.

The S&P 500 Index is an unmanaged, market value-weighted index of 500 stocks generally representative of the broad stock market.

The MSCI World Index is a broad global equity index that represents large and mid-cap equity performance across 23 developed markets countries and covers approximately 85% of the free float-adjusted market capitalization in each country.

The MSCI Europe Index captures large and mid cap representation across 15 Developed Markets countries in Europe and covers approximately 85% of the free float-adjusted market capitalization across the European Developed Markets equity universe.

The MSCI Emerging Markets Index captures large and mid-cap representation across 26 emerging markets countries and covers approximately 85% of the free float-adjusted market capitalization in each country.

Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced in a specific time period. GDP is the most commonly used measure of economic activity.

ISM Manufacturing Employment Index is one of the diffuse indicators, based on which the Supply Management Institute calculates the Manufacturing PMI. It reflects a change in employment in industrial companies.  The ISM Manufacturing Employment index is usually closely correlated with other data released by the Bureau of Labor Statistics. Growth of employment in the manufacturing sector usually reflects a generally positive situation in the labor market: manufacturers hire more employees, so the number of jobs is growing, and the unemployment rate is declining. The index generally does not influence dollar quotes directly and is normally interpreted as part of PMI.

[1]: https://www.cnbc.com/2020/07/31/stock-market-live-updates-nasdaq-futures-up-1percent-big-tech-bonanza.html

[2]: https://www.cnbc.com/2020/07/30/us-gdp-q2-2020-first-reading.html

[3]: https://www.cnbc.com/2020/07/31/personal-income-and-spending-june-2020.html

[4]: https://www.ismworld.org/supply-management-news-and-reports/news-publications/inside-supply-management-magazine/blog/2020-08/report-on-business-roundup-july-services-pmi/

[5]: https://www.ismworld.org/supply-management-news-and-reports/news-publications/inside-supply-management-magazine/blog/2020-08/report-on-business-roundup-july-services-pmi/

[6]: https://www.cnbc.com/2020/07/13/stock-market-today-sp-500-rallies-on-vaccine-hopes-three-investors-on-whats-next.html

[7]: https://www.who.int/docs/default-source/coronaviruse/situation-reports/20200712-covid-19-sitrep-174.pdf?sfvrsn=5d1c1b2c_2

[8]: https://eresearch.fidelity.com/eresearch/markets_sectors/sectors/si_weighting_recommendations.jhtml?tab=sirecommendations and https://www.wsj.com/articles/techs-stock-market-takeover-reaches-new-heights-11596985224

What's trending

view all

Tax Moves to Consider in Light of 2022’s Economic Challenges

Read more

Signs of Peaking Inflation

Read more

The Year of the Fed’s Inflation Showdown

Read more

Sophisticated planning for personal outcomes.
Contact us and meet your advisor today.

Meet us today

JSF logo

Subscribe to our mailing list and stay up to date with the latest information.

By submitting this form, you are consenting to receive marketing emails from: JSF Financial, LLC, 6300 Wilshire Blvd, Los Angeles, CA, 90048, http://www.jsffinancial.com. You can revoke your consent to receive emails at any time by using the SafeUnsubscribe® link, found at the bottom of every email. Emails are serviced by Constant Contact