Joel’s Weekly Talking Points – 9/8/20

Earnings releases of note this week: Slack, Oracle, Kroger, Gamestop, Peloton (not a recommendation to buy/sell/hold any of these securities)

1. Market recap:  Last week, US Large Growth began to pull back significantly on Wednesday ending the week down 3.41%.  Other equity asset classes followed suit with all major equity indices posting a negative week.  Bonds offered a little buffer with the Barclays Aggregate Bond index posting a positive 0.15% and Emerging Market Bonds up 0.48% on the week.
2. Data: The ISM Manufacturing Index rose to 56.0 in August, beating the expected number of 54.8 (Levels higher than 50 signal expansion; levels below 50 signal contraction.)  Unemployment numbers also looked better last week as nonfarm payrolls rose 1.371 million in August – this helped lower the unemployment rate from 10.2% in July, to 8.4% now.  While the job markets continue to recover there are some justified concerns that the unemployment insurance for those who lost their jobs early in March is running out in the coming weeks.  There seems to be a general consensus that there will be an extension similar to 2008 but given the political partisanship currently prevalent in the US that may be a very large ask.
3. It must be election season: We are starting to come into the home stretch of the 2020 election season and there may be plenty of “surprises” along the way.  I am still of the belief that we’ll have a vaccine announcement as early as October, and I am sure there will be a few new “controversies” along the way on both sides.  As I will write and say a lot in the coming weeks, we will not be making any material changes to portfolios based on “Red/Blue”.  Hartford Funds put out an outstanding piece last week that showed once you back out the two extremes of the last 20 years (the dot-com crash and the Global Financial Crisis) there is virtually no difference in market returns between Red and Blue Presidents.
4. Pandemic:  We continue to see declining numbers of new cases here in the US – the numbers are still pretty bleak at an average of roughly 30,000 new cases a day but this is lower than the 50,000 daily cases we were seeing a month or two ago.  For some context, Italy and Germany are averaging 1-2 thousand per day and Spain and the UK about 3 thousand per day.  We have a very long way to go.
5. Pullback Imminent?  A couple weeks ago I wrote that Bob Doll from Nuveen, who many of you know I used to work with and respect greatly, wrote in his weekly column that there was a chance for a market pullback in the coming weeks.  Looks like Bob may have been right.  We are of the opinion as of today that this may be a “run of the mill” correction that was needed.  No one likes it when markets go down, but there are times when a healthy selloff trims some of the froth out of the highest flyers in the market.  This can often create the opportunity for a new rally and new highs down the road.
6. Fun Fact of the Week:  CONSECUTIVE BEARS – Over the last 75 years, the shortest time period between the end of one bear market and the beginning of another bear market is 2 years and 2 months.  The S&P 500 fell 22% during a bear market that ended on 10/07/66.  The next bear market for the stock market, an 18-month long tumble of 36% began its downward slide on 11/29/68 (source: BTN Research).

Bottom line: Caution remains the theme of the week.  Corrections are healthy in my opinion, especially when there has been significant upside in markets, with little to no downside for several months.  That’s pretty much where we have been since March aside from a small blip in June.  We are in the middle of the largest pullback since March and again, I cannot stress this enough, this may be a healthy correction in that it will prevent valuations from getting too far ahead of themselves.  We need to see continuing improvement in the economic data however for this to be the beginnings of a new rally.

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