CIG Asset Management Update October 2020: A New Hope?
Summary:
- Diversifying to include Emerging Markets helps in tough month for Developed Markets.i,ii,iii
- Continued worries about rising COVID-19 cases and the economy.iv
- Narratives appear to be shifting as more evidence of a potential market inflexion point.
Commentary:
Globally, this month was tough for Developed Markets and not for Emerging Markets. In October, returns for the S&P 500 were -2.8%[i] and MSCI EAFE was -4.1%[ii] while the MSCI Emering Markets was +2.0%[iii]. It was the second month in a row of monthly declines in U.S. equities. As mentioned before, we continue to employ diversification specifically to areas like Emerging Markets to potentially cushion against U.S. equity losses as in October.
Overall, Developed Markets suffered from increasing COVID-19 cases[iv] and in the U.S., diminished hopes of a pre-election stimulus package. The month culminated with a -5.6%[v] sell off during the last week when technology earnings missed expectations, with Microsoft disappointing most in our opinion.
Underneath the surface of a post-election rising market tide, the relative price movement in sectors and investing styles (Factors) appears staggering. Our broad measures of the underlying health of the market continue to worsen. Events happen daily that have either likely never happened before or not happened in a long time. For example, on November 4, the Dow Jones Transportation sector had its worst day relative to the S&P 500 since April 2009, down almost -4%[vi]. Growth had its best day versus Value (using Russell 1000 indices as proxies) since January 2001 – almost 20 years![vii] In our opinion, the market narrative appears to be that the Federal Reserve has everything under control and that it has “got your back.” Meanwhile, we continue to worry about how COVID-19 will affect the economy this winter given the explosion of cases shown by the Johns Hopkins University’s Daily COVID-19 Data in Motion.
In October, we saw the beginnings of a narrative shift to a scenario that reminds us of 2000, similar to what we discussed in our August update. In that market cycle, the technology bubble was formed by companies from buying to prepare for the risk that at the stroke of midnight on January 1, 2000 their computers would be unable to function. In 2020, companies and individuals spent on technology to work from home during a pandemic. In both cases, decelerating earnings occurred once priorities shifted away from investments in technology. Last month, it appeared that investors started to choose between decelerating and expensive large companies versus opportunities in growing and cheaper small companies where client portfolios have some investments. Specifically, the Russell 1000 Growth Index (large) lost -4.7%i versus the Russell 2000 Index (small) gained 3.4%i in October. This shift is potentially bullish for CIG’s portfolios and less so for investors indulging in passive investments[viii].
We would like to thank our clients and friends for their continued trust and support, as well as to respectfully encourage all to focus on the positives on Thanksgiving Day. Obviously, 2020 has been an excruciatingly difficult year for many of us and it continues with the contested election and the division in the country. However, we have a newfound appreciation for going to family gatherings, restaurants and sporting events, for more frequent phone calls with elders, and for being able to see our children during the workday at home.
Lastly, we suggest that you listen to the replay of our webinar “Keeping your Financial Plans Alive Amid Chaos.” We discuss the challenges, opportunities and questions ahead as we navigate the current and future market conditions.
This report was prepared by CIG Asset Management and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
SOURCES:
[i] Yahoo Finance
[ii] https://www.msci.com/end-of-day-data-search
[iii] https://www.msci.com/end-of-day-data-search
[iv] https://coronavirus.jhu.edu/covid-19-daily-video
[v] Calculated by CIG using data from Yahoo Finance for 10/23 to 10/30.
[vi] Research report from Epsilon Theory, “The King is Dead. Long Live the King” dated 11/5/20.
[vii] Research report from Epsilon Theory, “The King is Dead. Long Live the King” dated 11/5/20.
[viii] While small companies as measured by the Russell 2000 small-cap index has had six 10%+ multi-day moves in 2020, per Bespoke Investment Group, the number of underlying companies with negative profits appears to be quite large relative to history and could pose a problem if investors just buy the index versus those stocks which have positive earnings.
CIG Asset Management Update April 2020: Uncharted Territory
Equity markets embarked on their own version of the much hoped-for “v” shaped economic recovery during the month of April, even as economic data continued to record nasty numbers. The S&P 500(1) gained +12.7%, recovering much of the prior month’s losses. Outside of the U.S., the MSCI EAFE net(2) was up +6.5% and the MSCI Emerging Markets Index was up +9.2%(2). Within fixed income, the Barclays U.S. Aggregate Total Return Index (3) returned +1.8% and the Barclays U.S. High Yield Index(3) increased +4.5% for the month.
In April, there was a continued tug-of-war between economic reality and hopes that the worst of the pandemic may be behind us:
On Friday, April 3, it was reported that the March unemployment rate rose to 4.4%, the highest since August 2017.(4) Over the following weekend, many anecdotal news stories came out, spreading hope that COVID-19 was peaking. The ensuing Monday, April 8, the S&P 500 was up +7.03% for the day(5).
The weekly unemployment report on April 9 showed another 6.6 million in weekly claims(6), only to be quickly forgotten about as the Federal Reserve issued a statement within seconds of the Department of Labor release. The Fed announced a $2.3 trillion relief package including the Main Street Lending Program, to lend money to mid-sized businesses, and a municipal and corporate bond buying program. This latest Fed action put them far past anything they attempted during the 2008 Great Financial Crisis.
The April 16 weekly unemployment claims were 5.2 million(6), and the following day, a report that Remdesivir, an anti-viral drug may help treat symptoms of COVID-19, was made public.
Then on April 21, West Texas Intermediate oil futures settled at a negative number – never before had that happened! The following day, President Trump tweeted that we could shoot Iran boats down in the Persian Gulf, and of course, the oil and the stock markets rallied.
On April 23, weekly unemployment claims totaled 4.4 million(6). The following day, April 24, President Trump said that Apple CEO Tim Cook told him in a private conversation that he believes there will be a “v” shaped economic recovery, and markets moved higher.
April 30 weekly report brought another 3.8 million unemployed claims(6). The following weekend, several states began to gradually reopen their economies.
As can be clearly seen in the above timeline, every extremely negative economic statistic that was reported in April was met soon after by either a Federal Reserve announcement, a Trump tweet or positive news stories about pandemic hopes.
No rallies are more violent than bear market rallies and seeing April produce one of the most forceful rallies in decades fits that playbook. We would argue that the markets just followed a historic playbook given historic interventions on the monetary and fiscal fronts. Warren Buffett indicated at his May shareholders’ meeting that he’s not finding places of value to invest and has announced the selling of all airline shares with the view that the impacts of the recent crisis will not magically disappear but will take time to filter through the system.
In the meantime, what is driving the performance of the S&P 500 Index? To oversimplify, it comes down to five companies; Facebook (FB), Amazon (AMZN), Apple (AAPL), Microsoft (MSFT) and Alphabet (GOOGL). The acronym that most on Wall Street use is FAAMG. Year-to-date through April 30, the FAAMG stocks are up an average of +10% versus the other 495 companies in the S&P 500 down -13%(7).
The performance spread between the FAAMG stocks and rest of the S&P 500 will most likely narrow over time. The lagging 495 stocks could begin to catch up with the leaders, FAAMG could start underperforming, or a combination of the two.
We have mentioned before that it’s not possible to forecast the path of the pandemic. In contrast to the above, states reopening and the massive Federal stimulus have already produced “green shoots” suggesting that the economy could begin to recover. Starbucks announced on May 5 they planned to open 85% of its locations by the end of the week, with contactless pickup and cashless payments. Simon Properties, the country’s largest shopping mall operator, announced it would open malls as states allow it. Recent activity on the Apple map app is showing signs that driving activity is starting to rebound. We would especially like to strike an optimistic tone on that last point.
Here at CIG we continue to be proactive and nimble as we see how long this bear market rally and tug-of-war can continue.
This report was prepared by CIG Asset Management and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
SOURCES:
- Calculated from data obtained from Yahoo Finance, as of May 1, 2020.
- MSCI, as of May 1, 2020
- NEPC
- Bureau of Labor Statistics, April 3, 2020
- Calculated from data obtained from Yahoo Finance, as of May 1, 2020
- United States Department of Labor.
- FactSet, Goldman Sachs Global Investment Research