Market Commentary July 2020
by Steve Conard, CFP®
The US stock market has truly resembled a roller coaster ride through the first half of 2020. A flat January preceded a steady climb to new record highs in mid-February in both the Dow Jones Industrial Average (DJIA) and S&P 500 indices, before both lost over one-third of their value within a 16 trading day plunge culminating on March 23rd. The market’s worst quarter since 1987 was then followed by its best quarter in over 20 years as the 30-stock Dow ended the 2nd quarter with a 17.8% gain, its biggest quarterly rally since the first quarter of 1987. Not to be outdone, the S&P 500 had its biggest one-quarter surge since the 4th quarter of 1998, soaring nearly 20%. But the big winner was the Nasdaq Composite index, which jumped 30.6% for the quarter, its best quarterly performance since 1999. (Index performance numbers provided by JPMorgan Asset Management.)
This wild ride has left both institutional and retail “mom & pop” investors wondering what may be lurking around the next corner. Much of the confusion stems from the disconnect between the market’s huge rally and the reality of a deep recession induced by the COVID-19 pandemic lockdown of the nation’s economy. By June 30th, the Nasdaq Composite index had fully recovered and reached a new all-time high, while the S&P 500 was within 10% of its historical peak. But this historical rally is difficult to trust due to a host of underlying patterns we have observed which include the following:
- A large performance gap between ‘growth’ versus ‘value’ stocks in the indices
- Very narrow leadership, with a relative handful of stocks accounting for the lion’s share of index gains
- Significantly reduced daily trading volumes in the 2nd stage of the rally (since mid-May) versus the initial stage (late March to mid-April)
- Market participation – institutional (“smart money”) investors have retreated to the sidelines, replaced by retail (“dumb money”) investors
- Evidence of novice millennial-aged day-traders speculating heavily on big-name tech stocks and high-risk situations.
Wall Street traders appear to be banking on two factors as they push stock prices seemingly well beyond what badly-weakened corporate profits should support going forward: 1) an ever-supportive Federal Reserve and 2) discovery of a successful coronavirus vaccine and/or treatment – sooner than later. For its part, the Fed added corporate junk bonds to the list of assets it is now (for the first time ever) willing to print money to buy if necessary to prevent weak companies from going bankrupt. Fed Chairman Jerome Powell has even hinted that it will consider buying stocks, a move that reveals an underlying view of a very fragile economy and financial system.
For these reasons and others, we believe that caution remains in order in the current environment. Using history as a guide, we cannot dismiss the possibility that the ‘V’-shaped market chart through June of 2020 could very well turn out to be the first half of what is ultimately a ‘W’-shaped chart when the COVID-19 market cycle is finally behind us.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors. The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.