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.
Let’s get started:
1. The November 3rd Elections are less than 60 days away and are one of the last “known” hurdles for markets this year. There is an old investment saying- ‘bad certainty is better than uncertainty’. This year, like many elections in the past, one’s perception of a ‘bad certainty’ is probably greatly influenced by their personal political leanings. Unsurprisingly, a recent publication from Pew Research Center noted a wide divide between Democrats and Republicans on some current issues, such as protest, but nearly equal dissatisfaction over the inability for Americans to ‘agree on basic facts even if they disagree politically’:
2. Current polling data for the Presidential Election from RealClearPolitics (RCP), a non-partisan polling aggregation website, indicates Biden is leading in an average of the national polls…
3. … Though for financial markets, polling wasn’t a great indicator of election results during the 2016 election. Below are what national polls indicated at the same point in time during the 2016 presidential race:
4. To give a better idea of the polls used by RealClearPolitics we included a snapshot of the most recent national polls that comprise the RCP Poll Average:
5. It’s not unexpected to see a modest increase in market volatility in the weeks preceding Election Day. Below are charts of the VIX, an index that represents expected market volatility, for the past few elections. We excluded the 2008 election as volatility was already highly elevated at the time due to the Great Financial Crisis:
6. Despite whatever concerns may have existed in markets pre-election, most modern era U.S. Presidents have enjoyed favorable stock market performance during their time in office. The most recent exception being George W. Bush, whose time in office was bookended by the September 11th Terrorist Attacks and the Great Financial Crisis in 2008.
7. It’s been over 100 U.S. trading days since the S&P 500 bottomed on March 23rd. While most asset classes have recovered off their lows, the dispersion of returns remains wide. For much of the summer, the larger weighting in technology oriented companies within the Russell 1000 Growth (orange line) has buoyed its return relative to other large cap indices, such as the Russell 1000 Value (grey line), which tends to have a greater weighting towards dividend paying companies, like financials.
8. For comparison, below is a chart that displays market performance after the same number of trading days following the March 2009 market lows. One slight difference in the two recoveries is the seemingly greater synchronization, or similar rise/fall patterns, across asset classes during the 2009 recovery vs. today.
9. There’s been a noticeable uptick in the weekly volume of equity call options this year. An equity call option is a traded contract that gives the owner the right to purchase a stock at a specified price within a set time period. They are typically used for speculative trading, hedging or for income (in certain instances). The rise of trading apps, such as Robinhood, has made these contracts available to less sophisticated investors with little trading experience and, in some instances, little income. It’s possible there is no link between the two, but nevertheless the timing seems at least curious. The July 2020 Wall Street Journal article, ‘Everyone’s a Day Trader Now’, expands on this in greater detail.
10. One of the most popular stocks traded on the Robinhood platform is Tesla. Tesla’s share price has appreciated significantly year-to-date (as of 8/31/2020) …
… Though there hasn’t been a significant change in 2020, 2021, 2022 or even 2024 estimated earnings that would seem to warrant such a rapid rise in share price:
11. Major indices have traded mostly lower since the start of September, with this year’s best performing asset class, Large Cap Growth (Russell 1000 Growth), seeing the most pressure as investors trim gains in technology oriented companies. The current pullback is mostly viewed as ‘healthy’ and likely needed to reign in some of the excesses that had developed in valuations and sentiment; nonetheless it’s a trend market participants will likely be watching.
… As noted above, Tesla is an example of the type of stock that had likely seen excesses in valuation and sentiment. It is also one of the stocks that has seen selling pressure to start the month, at one point trimming more than a quarter of its year-to-date gains in just a few trading days:
12. Supporting markets is an accommodative Federal Reserve. Over the past few weeks Chairman Powell has made a number of noteworthy statements that impact monetary policy. One being the Federal Reserve will allow inflation to run above their target to ensure maximum employment prior to raising interest rates. In another, he said it was unlikely the Federal Reserve would raise interest rates in the next few years. Since 2010, there does seem to be a positive correlation between rising stock prices (as measured by the market cap of the S&P 500) and the size of the Federal Reserve’s balance sheet (purple line) during periods of quantitative easing.
13. Economists surveyed by Bloomberg expect solid GDP growth during the current quarter and then a gradual return to more ‘normal levels’ over the subsequent quarters. The simplest explanation for the variance in growth numbers is Q3 GDP growth will be compared to Q2 GDP, a quarter that saw significant economic contraction, creating a favorable comparable period. In other words, the economic decline caused by COVID mitigation efforts in Q2 can make any positive economic growth in Q3 look significant. The following quarters will be comparing anticipated positive GDP growth periods against other positive growth periods making the numbers appear more ‘normalized’.
14. The U.S. labor market has become an interesting story. On one hand, the number of unemployed persons has fallen (blue line) and the number of individuals on ‘temporary layoff’ (orange line) has also declined, seeming to indicate some of those impacted by COVID related shutdowns and furloughs have been rehired….
…. On the other hand, the number of weekly claims for unemployment insurance continues to remain elevated (orange line, far right axis), with nearly 1 million initial claims a week for unemployment benefits. Additionally, the number of job losses the are becoming ‘permanent’ also continue to rise (purple line, near right axis). The consumer accounts for a large piece of the U.S. economy, so all eyes will likely continue to be on employment/unemployment trends over the coming months.
15. The Weekly Economic Index, a high frequency snapshot of economic activity published by the Federal Reserve Bank of New York, continues to incrementally recover and continues to suggest the decline in economic activity bottomed in late April/early May.
Lastly, the NFL season starts this weekend. Statistics website FiveThirtyEight predicts the Philadelphia Eagles will finish the season with a 9-7 record. They give the Eagles a 57% change to make the playoffs and a 4% chance to win the Super Bowl.
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.
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