by William Henderson, Vice President / Head of Investments
The U.S. equity market finished the week on September 11, 2020 lower across all three markets: Dow Jones Industrial Average (1.7%), S&P 500 Index (2.5%) and the tech-heavy NASDAQ (4.1%). The unknowns we have mentioned in previous weeks continue to haunt the markets: continued COVID-19 pandemic and the search for a vaccine, the U.S. Presidential Election, the lingering but recovering U.S. Recession and finally political and social unrest bordering on mass protests. As if that’s not enough, we can toss in wildfires on the West Coast and hurricanes on Gulf Coast. Given all that is being thrown at the economy, the recovery continues its slow slog towards normalcy. We may have four unknowns, but we have one known and it is a really big one. It is Jay Powell and the unstoppable power of the FED. Mr. Powell has promised to give the markets and the economy historic low rates into 2022. Practically “free” money, trillions in economic stimulus, an obeisant view of inflation and we have a FED that is all about forcing an economic recovery. Treasury Secretary Mnuchin continues to work on an additional stimulus package but Republicans and Democrats cannot come to an agreement.   

We continue to see evidence that pockets of the economy are doing very well. Amazon.com announced on September 14, 2020, that they will be hiring 100,000 full- and part-time employees across the U.S. and Canada. Anyone that has a doorstep or front porch in the U.S. is probably used to seeing the cardboard smile boxes sitting there with recently ordered goods from Amazon.com. Other stories to watch: Oracle’s winning bid for the U.S. Operations of the video-sharing app TikTok; the massive, potentially record-setting $30 billion IPO of the Chinese fintech titan Ant Group, co-founded by Alibaba billionaire Jack Ma; and the ongoing global race for a COVID-19 vaccine. 

It continues to be a battle between the unknowns and the knowns. We have major issues occurring in 2020 that continue to worry the consumer (Main Street) but the FED is doing all it can to push a recovery, and the markets (Wall Street) seem to like that story a little bit more. Our advice: Stay diversified and keep a long-term view of markets and the economy.

by Maurice (Mo) Spolan, Investment Research Analyst
Stocks had a strong week as the S&P 500 finished up over 3%. The bellwether equity index returned over 7% this month, the best August performance since 1986. International equities also fared well over the past month. The Barclay’s Aggregate Bond Index was down about one half of one percent last week, ending August 1% in the red.

The noteworthy event of the week was Fed President Jay Powell’s virtual address. In a departure from legacy policy, the central bank is slightly altering its approach to inflation. Whereas in the past the Fed aimed to curb inflation above 2% via interest rate hikes, the central bank will now allow inflation to overshoot the target such that its long-term average is 2%. Inflation has been tame since the Great Financial Crisis, generally under 2%.

The market seemed to perceive Powell’s comments as affirmation of a “lower for longer” interest rate environment, which is a bullish dynamic for equities. VNFA Head of Investments, Bill Henderson, noted Powell’s intentions to direct monetary policy on a prospective, rather than reactionary, basis as further indication that the central bank will be accommodative going forward.

by Maurice (Mo) Spolan, Investment Research Analyst
The S&P 500 closed last week at an all-time high, which re-established a bull market, based on common definitions. The bellwether index eclipsed its February peak in just 126 trading days, which is 10 times faster than the average bear market recovery throughout history. The market bounce has been led by technology stocks, as exemplified by Apple, who, last week, became the first company ever to achieve a $2 trillion market capitalization. While technology companies have been largely unencumbered by the pandemic, CNBC reports that a majority – 62% – of stocks in the S&P 500 remain below their all-time highs. In particular, laggards are concentrated in sectors such as Financials, Energy, and Travel & Leisure, where the greatest economic damage is taking place. The S&P has been able to stage this recovery, despite many companies still struggling, because the index is market cap-weighted, which means that the largest companies have the greatest impact on the index’s price. Presently, the largest constituents are technology companies who, as noted, have benefited from the pandemic, economically speaking.

This phenomenon also helps to explain how the stock market can thrive while the broader economy contracts: the big tech companies have a much greater influence on the price of the S&P 500 than they do on economic output. To illustrate this point in broad strokes, consider that the combined revenue of Amazon, Apple, Facebook, Microsoft and Google amounts to less than 5% of U.S. GDP, while the market capitalizations of such companies account for over 20% of the S&P 500’s value. While U.S. GDP reflects the cumulative output of hundreds of thousands of small businesses, in addition to large technology companies, the stock market more closely tracks the performance of the very biggest corporations.

by Maurice (Mo) Spolan, Investment Research Analyst
The S&P 500 was up 0.7% last week, as the index now rests less than 1% below its February all-time highs. The Barclay’s Aggregate Bond Index, by contrast, was down 0.9% as interest rates rose (bond prices decline when rates increase).

The headline economic figures of the week pertained to consumer spending, jobs and inflation. Retail sales increased 1.2% in July, a sharp deceleration from June’s 7.5% gain, but still a healthy figure in the midst of a pandemic. On the jobs front, unemployment claims fell below 1 million for the first time since March, an indication that Americans are returning to work. Last, inflation jumped 0.6%, the largest one-month increase since 1991. However, CPI is running at a moderate annualized pace of 1.6%, below the Fed’s 2% target, and more sustained hints of inflation will be required before the central bank adjusts its highly-stimulative stance.

As the presidential election looms less than three months away, Joe Biden made news by selecting Kamala Harris as his running mate. The Wall Street Journal reports that traders are bracing for a choppy finish to the year, as market volatility has historically been above average during election seasons. Also, in the political sphere, Congress broke for summer recess without passing another round of stimulus. While President Trump hopes to provide support by way of executive order, the constitutionality of his plan remains in question. The economy, particularly the consumer, is likely to suffer if no further fiscal stimulus is delivered. 

by Maurice (Mo) Spolan, Investment Research Analyst
U.S., international and emerging market equities were all up between 1% and 3% last week. Fixed income indices, such as the widely followed Barclay’s Aggregate, have provided returns only slightly above zero over the last month, a result of the historically low rate environment in which investors are participating.

The U.S. added about 1.2 million jobs in July, a considerable deceleration from the 4.8 million added during June. While employment gains are certainly welcomed amidst a global pandemic, the slowdown may indicate the unfortunate possibility that new job growth is plateauing. This is troublesome because the unemployment rate remains very high, at 10.2%.

With Q2 corporate earnings almost complete, S&P 500 constituents have experienced an aggregate decline in earnings of 33%, the greatest year-over-year stumble since 2008. With that said, analysts expected earnings to erode by 40%, so companies have beaten expectations.

As Democrats and Republicans remain distant in their proposed stimulus packages, President Trump signed an executive order over the weekend to provide fiscal support. Whether the order will actually come into effect, however, is uncertain, as several legal analysts believe that it is unconstitutional for the president to supersede congressional spending authority.

by Maurice (Mo) Spolan, Investment Research Analyst
Stocks were up around 2% last week, closing out July with gains near 6%, a very strong month of returns. Nonetheless, Q2 GDP fell 32.9% on an annualized basis, the fourth-greatest decline in the last 100 years, according to MFS Investments. Corporate profits are also in deterioration, as Q2 earnings have thus far arrived 36% below last year’s figures, the largest slump since 2008.

Tech stocks were in the spotlight as antitrust hearings investigated the extent to which economic power is concentrated in Amazon, Google, Facebook and Apple. Not ironically, such companies reported growing revenues in Q2 while the “brick-and-mortar economy” struggles gravely during the global pandemic. Tech stocks continue to hold an outsized position in the major indices and are therefore a major driver of the market’s resiliency in 2020.

Unemployment benefits officially expired on Friday while Congress remains in discussion to provide the next round of support. Though the two parties are still distant in their proposals, it is highly probable that a deal of some magnitude will be passed. Updates will be provided in future commentaries as news materializes.

by Maurice (Mo) Spolan, Investment Research Analyst
Stocks were mostly flat last week as the Dow, S&P and Nasdaq have now posted year-to-date performance of -7%, -0.4% and 15.7%, respectively. At present, the market’s focus is on the next round of fiscal stimulus, given that the $600-per-week unemployment benefits will expire on July 31. The GOP has proposed a plan that amounts to $1 trillion of support and is headlined by a one-time payment to Americans that begins at $1,200 and decreases according to income level. In addition, the plan would provide $100 billion to universities, as well as support for testing measures. However, the GOP is opposed to continuing the flat $600 weekly unemployment checks, because that quantity is often greater than what its beneficiaries earn in working wages. Therefore, the GOP contends, the unemployment benefits have discouraged individuals from seeking work. The GOP’s proposed unemployment benefit amounts to 70% of the working wage earned by its recipient.

Across the aisle, Democrats are lining up a support bill of $3.5 trillion. Democrats counter GOP concerns regarding flat-rate unemployment benefits by stating that more nuanced measures, such as those based on a percentage of wages, are overly complicated, and therefore, would not be effectively implemented within a useful time frame. Indeed, Nancy Pelosi remarked that the reason for the initial $600 flat rate was ‘simplicity’. Pelosi also added that the GOP’s unemployment plan is discriminatory, in that the government should not encourage individuals to return to work if they are afraid of getting sick.

When considering that a $2.5 trillion gap remains between the parties, Mitch McConnell noted that it is “unlikely” that a bill is passed prior to the expiry of the current unemployment benefits. Mark Meadows, White House Chief of Staff, suggested that the parties may attempt to agree on a shorter-term solution and then resume dialogue at a later date. Democrats have rejected this idea. While the disparity between proposals remains quantifiably enormous, both sides of Congress are incentivized to provide some order of fiscal relief before the August recess, which effectively marks the deadline for negotiation.

by Maurice (Mo) Spolan, Investment Research Analyst
Equity markets were up mildly last week as investors weighed the continuing surge in coronavirus cases against a couple of promising vaccine candidates. Moderna Therapeutics and Oxford University, the engineers behind the two leading inoculants, both announced last week that their vaccines demonstrate signs of efficacy. Anthony Fauci added that he believes that a vaccine will be approved by year-end, however, the timeframe between a vaccine’s certification of safety and effectiveness, and its mass production and widespread dissemination, remains unclear.

In other news, the world’s largest banks kicked off earnings season by tucking away billions of dollars for expected loan losses over the coming period. Jamie Dimon, the CEO of JP Morgan Chase who is known for his prudence, noted that the past several months has not represented a traditional recessionary environment because of massive government support, and that he expects the economic situation to worsen over the back-half of the year. With this said, stock market analysts polled by Factset expect impacts from the coronavirus to be present in second quarter corporate updates: S&P 500 earnings are forecasted to decline by 44% versus the year-ago period, which would be the largest fall since the Great Recession. In contrast to Dimon’s cautions, analysts expect Q2 to represent the worst for corporate earnings.

by Maurice (Mo) Spolan, Investment Research Analyst
Stocks were roughly flat last week as COVID-19 cases surged in each of the nation’s three most populous states: California, Florida and Texas. According MFS Investment Management, high-frequency data such as retail foot traffic and credit card spend suggest that consumers have pared back activity over the past couple of weeks. This is consistent with the fact that approximately 30 states have recently reversed reopening measures. In addition, the $600-per-week unemployment benefit is set to expire at July’s conclusion, layering on further uncertainty as to whether congress will pass more stimulus to keep the economy stabilized.

Economic activity recovered faster than expected during May and June, however, data appears to show such a recovery now slowing in July as consumers act with greater caution in light of surging case-loads. Economic uncertainty remains extremely high, while unfortunately, the outlook from a health perspective is a bit more concrete: the coronavirus will remain a major impact on society until a vaccine is widely disseminated or a highly effective treatment is concocted. The unpredictability associated with the ongoing economic and financial climate illustrate why adherence to one’s long-term savings objectives is almost always the best way to invest. 

 View/Download PDF version of Q2 Commentary (or read text below)
by Maurice (Mo) Spolan, Investment Research Analyst

Equities
The S&P 500 posted a greater than 20% gain during Q2. For the 50 days ended June 3^rd, the U.S. stock markets experienced the greatest two-month rally in history, increasing nearly 40%. The breadth of the equity climb was also apparent, as the Russell Mid-Cap and Small-Cap indices reported yet greater performance than did the S&P 500, signaling an embrace of potentially riskier stocks. International stocks also attended the rally, although gains abroad were milder than those in The States.

There are three important points about the rally on the front of our minds. First, the equity performance in Q2 is all-the-more extraordinary when contrasted to what occurred at the conclusion of Q1, when the stock market was in the midst of the steepest bear market entry of all time. The dynamics of the last four months illustrate just how challenging an investment strategy is market timing. Second, the Federal Reserve’s commitment to purchase trillions of dollars of fixed income securities was instrumental in the market bounce. The Fed injected an unprecedent degree of liquidity into the markets, which forced interest rates downward and equipped investors with newfound cash, ultimately working to increase the relative attractiveness of stocks versus bonds. In addition, the Fed’s actions allowed companies to issue new debt to weather the COVID-19 storm, increasing investor confidence in the resiliency of many major companies. Last, the stock market rally was encouraged by economic data that improved with rapidity in May and June as social distancing guidelines were relaxed, demonstrating that something akin to a V-shaped recovery may be a real possibility.

Bonds
The Barclay’s Aggregate Bond Index returned just under 3% during Q2, while fixed income strategies with risk profiles more analogous to equities – such as those focused on consumer credit or below-investment grade corporations – offered better performance. Interest rates remain near zero as the yield curve – the difference between rates on short-term and long-term treasury instruments – is quite flat. Fed Chairman Jay Powell shared in an interview during Q2 that the U.S. Central Bank is “not even thinking about thinking about raising rates”. Interest rates are likely to remain low for the foreseeable future as monetary actions attempt to facilitate an economic recovery.

Outlook
As most states have begun the reopening process, new COVID cases are accelerating while economic data is improving. Several states who have reported the greatest number of new cases, namely Florida, Texas and Arizona, have walked back much of their reopening measures in an effort to mitigate viral spread. If more states experience coronavirus surges and pivot to stricter social distancing guidelines in response, economic data is likely to worsen, and financial markets may react negatively. In addition, the presidential election will be heating up over the next three months, and asset price volatility has historically heightened during pre-election periods. With this said, the power of the monetary and fiscal stimulus by the Federal Reserve and the U.S. Treasury is not to be discounted, and both forces are near certain to continue to support asset markets over the coming quarters. With uncertainty as pronounced as ever, we believe that investors are best off adhering to their carefully constructed long-term financial plans.

AUDIO: Q2 2020 Market Commentary
Our CEO, Matt Petrozelli, offers an analysis of Q2 and a forecast for Q3 for 2020. LISTEN NOW/DOWNLOAD MP3