Fidelity Bank - Wealth Management
August 2020 Market Review
US Equities continued their rally in August as economic activity trudged ahead at a more tepid pace than earlier in the summer. Most data releases continued to point to solid, though moderating, growth in August. The housing market remained the bright spot for the US economy with housing starts, existing home sales, and homebuilder sentiment (NAHB) all beating expectations. The number of new daily cases of COVID-19 has been continuing to decrease since the end of July. Advancements in treating the disease and hope of a successful vaccine have helped buoy investor confidence. US stocks gained 7.19% in August while the bond market retreated as Bloomberg Barclays Aggregate Bond Index lost 0.81%.
Through the end of August US Stocks have posted a total return of nearly 59% from their March 23rd low. This spectacular market performance has ushered the S&P 500 just short of a 10% total return for the year. The rising tide of the S&P 500 has not risen all boats. Just 6 companies (Apple, Microsoft, Amazon, Facebook, Nvidia, and Alphabet) have contributed 31% of the index’s performance since March 23rd. Excluding Apple, Microsoft, Amazon, Facebook, Nvidia, and Alphabet reduces the S&P 500’s total return to just over 40% since March 23.
On a year-to-date basis, if Apple, Microsoft, Amazon, Facebook, Nvidia, and Alphabet are discounted, the S&P 500 Index is actually down around 0.50% on a total return basis. Only a handful of companies, Large Cap Growth Technology stocks, are leading this market higher. This divergent performance has contributed to quite a large valuation difference between Large Cap Growth Technology stocks and the rest of the market, particularly Value stocks. Ultimately, this type of dichotomy in performance and valuation is unsustainable.
Institute of Supply Management PMI surveys, which tracks sentiment among purchasing managers at manufacturing, construction and/or services firms, rebounded from negative levels not seen since the Global Financial Crisis to its third month in a row of expansion levels in August. A PMI reading above 50 indicates expansion, while below 50 indicates contraction. August’s expansion reading of 56.0 is the third month in a row for expansion and is the highest reading since November 2018.
As alluded to above, unsurprisingly, Growth stocks fared better than Value stocks across market cap. Large Cap and Small Cap Growth gained 10.32% and 5.87% respectively, on the back of Technology stocks, while Large Cap value gained 4.14% and Small Cap Value gained 5.39 %.
9 of 11 of the Global Industry Classification (GIC) sectors were positive in August. Technology, Consumer Discretionary and Communication Services led the way gaining 12.01% 9.68% and 8.99%, respectively. Energy and Utilities were the laggards, losing 0.99% and 2.65%, respectively.
The US Dollar weakened against Developed Market and Emerging Market currencies in August. The Dollar Index, which measures the US Dollar against Developed Market currencies, lost about 1.30%. The MSCI EAFE index gained 4.10% in local currency terms but gained more than 5.14% in US Dollar terms. The MSCI Emerging Market Currency Index gained 0.87% versus the US Dollar in July. The MSCI Emerging Markets Index gained 2.17% in local currency and the conversion to US Dollars caused that gain to become 2.21% for US investors.
Treasury prices lost 1.10% in August as rates rose across almost all maturities on the yield curve. 20- and 30-year rates rose by more than 27bps. The Bloomberg Investment Grade Corporate Bond Index, which is sensitive to changes in the level of interest rates, lost 1.38% during August as rates rose across the yield curve. The Bloomberg High Yield Corporate Bond Index, which is less sensitive to changes in levels of interest rates, had another positive month gaining 0.95%.
Treasury Inflation Protected Securities (TIPS) gained 1.09%, as inflation expectations continued to rebound in August. TIPs outperformed nominal Treasuries by 2.19% in August and year-to-date lead nominal Treasuries by almost 90bps. Ten-year inflation expectations bottomed in March as market participant priced in expected inflation of only 0.55%, although the Federal Reserve continues to target a 2.00% inflation goal. As of the end of August, ten-year market implied inflation is 1.80%
Commodities produced their fourth consecutive month of strong returns in August. The Bloomberg Commodity Index gained 6.76%. Energy, Industrial Metals, and Agriculture led the way for commodity investors. Energy gained 13.12% and Industrial metals gained 6.94% as producer and manufacturer demand increased. Agriculture advanced 5.50% on the back on higher demand for soybeans from China. Gold, which had been the darling of investors the past several months, saw its first monthly decline since February. The spot price fell by about 0.40% in August as prices per ounce drifted south after reaching more than $2060 in early August. From an inflation adjusted price in current dollars, gold approached record highs but is still a bit shy of the prices of the early 1980s.
Real Estate Investment Trusts (REITs) gained about 0.14%, but confidence in tenant’s ability to meet rent and mortgage payments still weighs on the asset class. Still there is significant uncertainty for retail concentrated REITs as many suspect the behavior of leery consumers will be significantly altered by the lockdowns. Year-to-date, REITs are down about 10%.
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August 2020 Market Review is intended solely to report on various investment views held by Fidelity Deposit & Discount Bank and is distributed for informational and educational purposes only and is not intended to constitute legal, tax, accounting, or investment advice. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. Fidelity Deposit & Discount Bank does not have any obligation to provide revised opinions in the event of changed circumstances. All data is provided by Bloomberg Finance, LP and Morningstar Direct. We believe the information provided here is reliable but should not be assumed to be accurate or complete. Data, if not otherwise noted, is as of 8/31/2020. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer or recommendation to purchase or sell a security. Past performance is no guarantee of future results. All investment strategies and investments involve risk of loss and nothing within this report should be construed as a guarantee of any specific outcome or profit. Investors should make their own investment decisions based on their specific investment objectives and financial circumstances and are encouraged to seek professional advice before making any decisions. Index performance does not reflect the deduction of any fees and expenses, and if deducted, performance would be reduced. Indexes are unmanaged and investors are not able to invest directly into any index. The S&P 500 Index is a market index generally considered representative of the stock market as a whole. The index focuses on the large‐cap segment of the U.S. equities market.