This week we flirted with the return of record highs.

Our Top Market Takeaways for August 14, 2020.

Inside the markets

Running for the record


The story of the week: The S&P 500 briefly reached above its February all-time high closing level (3,386) on Wednesday, touching 3,387 intraday before finishing juuuust short of minting a record closing level. Heading into Friday, markets are still trying to break through, as a new record closing level remains elusive.

Nonetheless, the speed of this recovery has been nothing short of remarkable. When looking back at all historical bear markets and recessions dating back to 1929, the COVID-19 crisis has indeed been the fastest by a wide margin—for both its selloff and recovery. Note that in the previous 12 cycles, it took markets an average of four years to go from peak to trough and back to peak. (And for the Great Depression, it took 25 years!) Today, we’re just 177 days away from the S&P 500’s February all-time high. It looks increasingly likely that this could be the fastest roundtrip recovery from a 20% or greater plunge…by a long shot.

The chart displays all historical bear markets and recessions from 1929 through today. It indicates that during the first 12 cycles, markets took an average of four years to go from peak to trough and back to peak. For the COVID-19 crisis, the time from peak to trough to peak is seeming to move quicker than prior bear markets and recessions.

As we reflect on the journey from February 19th’s peak, we put together a few fast market facts on what’s changed and what’s stayed the same…

What’s changed:

  • We’ve dealt with a real bout of volatility (no surprise). After all, from 2012 to 2019, we didn’t see any swings of 5%—but this year has seen 10. Since 1980, only the Global Financial Crisis saw more instances. Since the depths of this crisis, volatility has massively chilled out, but even at current levels, we can expect daily swings of 1.4% over the next month (that’s more than the 0.8% average daily move since 1928).

The bar chart displays from 1980 through 2020 the number of volatile days per year, indicated by +/- 5% swings in the market in a given year. It displays that over this time period, the Global Financial Crisis had the most instances. In 2020, there have been 10 total +/- 5% swings
  • Index concentration has shifted even further in the favor of COVID-19 outperformers. Together, info tech, healthcare and consumer discretionary now account for 53% of the S&P 500—4.6% more than at the February peak. At the same time, financials, energy and industrials now account for 4.3% less of the index versus their pre-crisis weighting. 

The chart shows the percentages each sector (info tech, healthcare, financials, etc.) represents in the S&P 500 Index. It indicates that together, info tech, healthcare and consumer discretionary now account for 53% of the S&P 500.
  • Activity remains pretty muted (but at least it’s improving). NYC traffic congestion is still 42% of what it was in 2019, global OpenTable restaurant bookings are 48% lower compared to last year, and TSA checkpoint travel numbers are 25% of normal.1
  • Same goes for jobs. In the depths of the crisis, the U.S. unemployment rate hit its highest level since the Great Depression. At 14.7% in April, 23 million Americans were unemployed. Just a few months later, the unemployment rate has fallen to 10.2% (16 million unemployed), and weekly jobless claims just dropped below one million for the first time since March. Still, compared to the pre-crisis world, the unemployment rate was at 3.5%—a 50-year low.
  • The U.S. dollar has gone on a torrid decline. From February stock market highs, the DXY Index (which indicates the general international value of the dollar) has declined a whopping -6.5%. Even more, after rallying amid the flight to safety in March, the DXY is down -9%.
  • Silver has joined gold in the party. Gold’s rally has been a mark of 2020—crossing $2,000 per ounce for the first time ever and up nearly +30% since the start of the year. Yet you’d be remiss to ignore its silver cousin, which despite lagging as the yellow metal climbed, is now up almost +50% this year!

What’s stayed the same:

  • It’s still a “market of stocks.” Since bottoming in March, the S&P 500 has rallied roughly +50%, and over 80 of its constituents are up +20% or more. But for all the strength at a headline level, some 130 companies in the index are still down -20% or more.

The chart displays the percentage of S&P 500 companies that are companies which are up and down. Currently, over 80 companies are up +20% or more, and over 130 companies are down -20% or more.
  • Investors still dig cash. From January to mid-May, almost $1.2 trillion flowed into money market funds—a record inflow. Since then, we’ve only seen some $200 billion in outflows, which doesn’t appear too meaningful considering the $4.6 trillion still in money market funds—a full $1 trillion above January levels. Trouble is, cash isn’t earning anything these days…
  • The struggle is still real for yield. At about 70 basis points, the 10-year Treasury yield is roughly 90% lower than its 60-year average just above 6%. In fact, 2020 is the first year to see the U.S. 10-year Treasury yield drop below 1.0%.
  • Inflation still isn’t scary. Core CPI inflation (ex-food and energy) surged to 1.6% in July over the prior year (versus estimates for 1.1%). We think this type of move is healthy: Sectors that led inflation higher were those hit hardest by lockdowns (consistent with reopening), inflation is still below the Fed’s 2% target (accommodative policy is here to stay), and real rates are increasing along with inflation expectations (this is pro-cyclical growth).

The line chart shows U.S. Core CPI inflation (ex-food and energy) year-over-year % change from 2012 through 2020. It indicates that in July 2020, Core CPI surged to 1.6% over the prior year.
  • Megatrends—like digital transformation, healthcare innovation and sustainability—are only accelerating. Consider that some companies have already deployed cleaning robots to clean office floors, and some residential high-rises have begun to use COVID-19-killing robots to sanitize entire apartments. After all, the owner of a downtown Miami luxury high-rise recently claimed to be the first residential skyscraper in the United States to use an advanced UV robot to protect against the COVID-19 virus. Intelligent sterilization robots are also being deployed around-the-clock in the Hong Kong International Airport. The robots use UV light and air sterilization technology to maintain public restrooms and other airport operating areas. Studies are finding that disinfecting robots can decrease environmental infection rates between 50% and 100%. Further, the proof is in the market performance pudding (tech, tech-enabled and healthcare companies are the top performers by far this year).

The line chart displays the MSCI World sector price performance for information technology, healthcare, financials and energy from December 2019 through August 2020. It indicates that during this time period, information technology and healthcare sectors have outperformed financials and energy sectors.

We’ll leave you with this: Euphoria earlier this week aside, the fact that markets have eased off those highs only goes to demonstrate what we’ve said before: The coast is by no means clear. Washington is at a stalemate over stimulus, geopolitical tensions aren’t going away, the economic recovery is still very much in its early stages, and above all, the path of the virus remains uncertain. To manage the bumpy ride of volatility, having a plan is the best advice we can give. Especially during times like these, it is important to keep the goal of your money in mind. Are your investment goals short- or long-term? Volatility may matter in some cases more than others.

Diversifying across asset classes and geographies can provide one of the best protections there is during times of uncertainty. In the chart below, we look at three simplified portfolios of U.S. stocks and bonds: 100% stocks, 60% stocks and 40% bonds, and 40% stocks and 60% bonds. By this lens, following one of the sharpest selloffs ever, many investors have now recovered all their losses. It’s true that even the all-stock portfolio is back to even on a total return basis (we’re including dividends here), but diversifying with bonds helped to smooth out the ride—a blended stock and bond portfolio avoided the brunt of the latest market downturn and recovered its losses more quickly.

The line chart displays three simplified portfolios of U.S. stocks and bonds: 100% stocks, 60% stocks and 40% bonds, and 40% stocks and 60% bonds from February 2020 through August 2020. It indicates that during this time period, the diversified portfolios recovered their losses more quickly in comparison to the S&P 500.
1 NYC traffic congestion data sourced from TomTom’s traffic index, restaurant bookings from OpenTable’s “state of the industry,” and TSA checkpoint data from the Department of Homeland Security’s Transportation Security Administration.

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All market and economic data as of August 2020 and sourced from Bloomberg and FactSet unless otherwise stated.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.


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