Marshall Wealth IQ is aimed at sharing insightful financial market and economic data in easy to visualize charts with brief analysis. This commentary isn’t designed as a call to investment action, but rather as a dependable source to help you feel better informed about current events in today’s market and the underlying trends impacting current wealth.
We’ll call this issue ‘Virus, Voters and Valuations”.
Let’s get started:
1 | Anecdotally, there seems to be a lot of news alerts indicating surging COVID-19 case growth in the United States. This was likely more true from mid-June to mid-July when new cases were rapidly increasing. Over the past two weeks, the ‘second wave’ curve has seeming begun to crest and hospitalization data has looked to stabilize.
2 | Data is looking increasingly better in hard hit ‘second wave’ states like Florida, Arizona and Texas where new daily cases and hospitalizations seem to have peaked. For the U.S. economy, this may be the near-term reality- a patchy, varying reopening across the country with starts, pauses, re-openings.
3 | There are currently 25 vaccines in clinical evaluation and an additional 141 vaccines in preclinical evaluation. Economic research firm Pantheon Macroeconomics stated it perfectly in June, “No one wants to be short equities the day a vaccine is pronounced safe and effective, but that’s very unlikely to happen before September, with the results of the Oxford Vaccine Group’s Stage III trial. Three months is a longtime in markets”. Vaccine data aggregated per the World Health Organization:
4 | The United States Presidential Election is about four months away. Over the coming months a multitude of domestic and foreign policy plans will be presented to voters. With millions of Americans out of work, economic policy will likely be prominently featured. Here is an early look at current polling, from a variety of sources:
University of Virginia- Center for Politics:
5 | While the Presidential Election will likely provide plenty of fodder for market prognosticating and opinion programming, research from Bank of America Global Research indicates it may not matter much for the stock market. Below is a summary from their research report titled “A Walk Down Pennsylvania Avenue”:
“Is Mr. Market a Republican or a Democrat? To help answer this question Steve Suttmeier, technical strategist, provides a history of stock market performance for every Presidential term going back to 1872.
The limited number of observations and wide standard deviations makes drawing conclusions difficult, but counter to conventional wisdom, markets have on average done better during Democratic administrations. Regardless of party, markets during the first term have far outperformed a President’s second term, and the U.S. equity markets have posted above average gains when leadership changes to a new political party, suggesting the market rewards the removal of an underperforming unpopular executive.
During a President’s first term in office, the market performed best in the latter half of the term, perhaps as policies were adopted to ensure re-election, but in the second term, returns were more front-end loaded.” –Bank of America Global Research
6 | If you’re more visual, here is a chart of S&P 500 performance by Presidential term going back to Harry Truman. Stock market performance during President Trump’s term is the solid blue line:
7 | High frequency economic data, like the Weekly Economic Index published by the New York Federal Reserve, continues to suggest the United States economy troughed in late April and early May. The rebound in economic activity looks to have paused during the most recent wave of COVID cases in the south, likely the result of increasing initial claims for unemployment insurance:
8 | Second Quarter GDP will be released later this week. It is expected to be an ugly number and will likely get plenty of air time. Two thoughts: 1) As indicated by the chart below, the expected sharp decline, somewhere in the neighborhood of -35%, has been expected for several months. Not much new information will be gleaned from this report. 2) Economic growth is expected to continue to recover during the current quarter. Current economist expectations are for third quarter GDP growth in the low to mid-teens.
Source: Federal Reserve Bank of Atlanta
9 | At the end of June, headline indices, such as the S&P 500, have recovered from their March lows. However, investment returns have not been symmetric. Growth companies (such as Amazon) continue to significantly outperform almost all other investment styles – small companies (Russell 2000), foreign companies (MSCI EAFE), and value oriented companies (Russell 1000 Value)- by a wide margin.
10 | Typically, it’s not unexpected to see economic sensitive sectors, like consumer discretionary, outperform during the early part of an economic recovery while more defensive sectors, like health care, underperform as investors pay a premium for growth. Below, we show the forward Price/Earnings ratio, a valuation metric, for Amazon (the largest consumer discretionary component of the Russell 1000 Growth Index) vs. that of Johnson & Johnson (the largest health care component in the Russell 1000 Value Index). Using Amazon as an example, the Price/Earnings ratio of Amazon increased from about 90 to 150 over the course of the year, highlighting investor demand for the stock. Said another way, investors today are willing to pay a premium for Amazon stock, about $150 for $1 of earnings.
11 | Since the start of the third quarter, Value and Foreign stocks rate among the top performers. At this time, this is likely more the result of a small-amount of profit taking in some highly valued growth oriented sectors rather than a change market leadership.
12 | Interest rates remain very low. Below is a chart of the 3-month treasury bill rate. Those who own money market mutual funds have seen a comparable decline in yields:
13 | Credit markets continue to incrementally recover from the March sell-off. Credit spreads and bond prices are inversely related, meaning falling credit spreads indicate rising bond prices and vice versa. Federal Reserve action was an important driver of credit market stabilization.
14 | Our last chart. Since March, day trading seems to have reached popularity levels not seen since the late 1990’s. Some have speculated that without sports, bettors have taken to the stock market to find their thrills. With all four major sports leagues getting ready to start in August there may be some credence to those thoughts. Below is Google Trends data for search terms day trading and sports betting. Notice how interest in day trading (red line) increased when sports leagues suspended operations in mid-March and the sudden resurgence of interest in sports betting (blue line) as sports leagues restart.
It’s impossible for anyone to know with certainty what will happen today, tomorrow, or even a minute from now. Investment involves risk and volatility; it’s why long-term investors have historically been rewarded with excess returns relative to cash. Our investment department monitors market data and works with our wealth planning teams to right-size portfolios should something change relative to long-term trends. In the meantime, we’ll continue to share financial and economic data we believe is insightful and relevant to your wealth to help you feel informed.
Thank you for reading; please be well and stay healthy.
Adam Reinert, CFA, CFP®
George Evans II, MBA
Disclosure: Marshall Financial Group, Inc (“Marshall Financial”) is an SEC-registered investment adviser with its principal place of business in Doylestown, Pennsylvania. This newsletter is limited to the dissemination of general information pertaining to Marshall Financial Group’s investment advisory services. Investing involves risk, including risk of loss.
This newsletter contains certain forward‐looking statements (which may be signaled by words such as “believe,” “expect” or “anticipate”) which indicate future possibilities. Due to known and unknown risks, other uncertainties and factors, actual results may differ materially from the expectations portrayed in such forward‐looking statements. As such, there is no guarantee that the views and opinions expressed in this letter will come to pass.
For additional information about Marshall Financial, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). Please read the disclosure statement carefully.