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Monthly Market Update- September

August 31, 2020

As the world continues to feel the impact of the coronavirus pandemic, the markets are persevering. August was a solid month for all sectors, with stocks up 60% since March. What’s in store for September and what impact can we expect from vaccines, the upcoming election and more?

Continuing to defy conventional wisdom and historic seasonality, the recovery beat rolled massively on for stocks during August with a fully diversified equity portfolio jumping more than 6%. Led by the largest of the large cap tech stocks, most notably Apple and Microsoft, the S&P 500 (+7.5%) recorded its best August since 1986 and the Dow Jones Industrials (+8.9%) recorded its best August since 1984. In neither case did stocks perform particularly well in the ensuing four months – essentially flat each time – but as my father (and probably everybody’s father) used to say, ‘Nothing succeeds like success’. August, 2020, was certainly quite successful for stock investment portfolios with nearly every major large-cap average making new all-time highs.

A solid month for all sectors

Though Wall Street was led by mega-cap tech, all sectors – with the still-marked exception of fossil fuel-based energy – did just fine. Even the laggard banks, both large and small, tacked on a 5+% gain. The Dow Transports jumped 14% with even the rental car and airlines stocks up 20% or more. Quite frankly, owning stocks in August was, to use another old aphorism, like ‘shooting fish in a barrel’. Unless one’s portfolio was overly concentrated in either energy or, ironically, in high profile biotechs (more below), it will be hard not to open one’s monthly portfolio statement and not do a little dance.

Economic data has shown considerable improvement recently

It can certainly be argued that much economic data has shown considerable improvement over the past four weeks. Durable goods orders, anything to do with housing, regional manufacturing trends, even consumer spending – all have surprised to the upside. Yes, they are all still at absolute levels that are well below pre-Covid days and are not likely to make new highs for potentially one or two years.

But ‘on the margin’, we seem to be in a decisively solid uptrend, for the moment anyway.

Couple that with a still overwhelmingly supportive Federal Reserve, and indeed we have a reasonable fundamental and intellectual back-story for this surge to big new all-time highs for stock prices. Adding more than a little fuel to the fire was Fed Chairman Powell’s assertion last week that the Fed has no intention of even tapping the breaks if and when any inflationary pressure returns. That provided somewhat of a relief valve for the downward pressure on longer term interest rates, which in turn provided some positive impetus for the aforementioned bank stocks.

That said, in my opinion, and as I noted last month, with stocks surging in August that divergence between Wall Street (stocks) and Main Street (the actual economy) remains as wide as anything I’ve seen since I was a Street newbie in 1981, to include 2000 (more below).

COVID-19 vaccine update?

The race for the supposed cure-all Covid vaccines and treatments remains apace, with all sorts of pronouncements and even promises about near-term availability. Wall Street’s speculative side continued just as apace. The irony in August was that any attempt to keep up actually left one in the dust. Prior darlings Novavax, Moderna and Inovio were down huge last month. I mentioned the stock price of Kodak a month ago, at one point a potential recipient of huge government backing in the vaccine production pipeline. From basically $0-to-$60 in a few days, now back below $6…and this will continue.*

V-shaped reversal in stocks

In early March, just as Covid came fully into consciousness and the economy and markets were reeling, I wrote that any v-shaped reversal in stocks would, again in my opinion, and counter-intuitively, be terrible for their long run health. Even though certain policy-makers running are aggressively commanding the economy to fully ‘v-revert’ back to exactly where it was in early February, we all know deep down that’s not even a remote possibility…and that’s more than okay. Too much monetary and fiscal stimulus over the past few years has created far too many economic, and arguably societal, imbalances which must, must, must be corrected. As I wrote a few months ago, I have no doubt that when (not if) this happens, our economy and society will emerge far stronger than it was before, as it has done after every prior significant re-boot.

Looking back on high-performing Augusts

In addition to ’84 and ’86 with huge August returns, another was 2000 with the S&P and the Dow Industrials up also high single-digits. This which essentially was the cherry on top of the ice cream sundae of the bubble of 1999-2000 and an economy that had built itself accordingly, which in hindsight badly needed the same kind of re-boot that I believe we need now, twenty years later. The Friday before Labor Day, then August 30, marked the top. Everybody was all in, everybody was happy, and everybody was full up on mega-cap tech stocks, the FANMAGs of the day. Price-earnings ratios were through the roof, as they are today, and retail speculation was just as rampant.

Then reality set in and on Wall Street it got very ugly very quickly. More than 20% was chopped off stock prices by mid-October. After a fairly flat calendar Q4, the real bear market that presaged and then accompanied the 2001-02 recession set in, ending with stock prices down nearly 50% by the fall of 2002.

Other impactful events of the past

Then as now, there was also a lot of non-market-based news. Trying to match the news flow between then and now is a fool’s errand but there is most certainly one potential ‘Groundhog Day’ event. We should all recall the hotly contested 2000 presidential election, with the incumbent Democratic party losing to the GOP challenger only after a Supreme Court decision to abruptly stop a recount in Florida (remember ‘hanging chads’) in mid-December with less than a 1000-vote difference.

I’m not suggesting I expect that kind of sharp drop, nor even am I definitively expecting that we’ll get a ‘hung election’ again. Even if potentially the stock market movie of 2020 looks to have the same set-up as that of 2000, the characters and sets have all changed. Of course the biggest difference of all twixt then and now is today’s massively-accommodative monetary policy. So maybe the final script will also turn out radically different...but it would be foolish to ignore the similarities and to not have some degree of anchor to windward just in case.

And we do!

Stocks reach a new high

We continue to cheer stocks on ‘from underneath’ with a slightly below weighting to stocks versus long-term client targets. With all forms and fashions of stocks (and certainly yours) up nearly 60% since the March 23 low, we have still been participating very strongly.

64 days to go. Ugghh! I trust all feel the same way, no matter what your political persuasion. I personally careen between disgust and hope, nausea and optimism, wishing I could back to the days when I could get unbiased information from somewhere other than The Weather Channel. It’s sort of trite to say ‘buckle up’ in times like these but that’s indeed what we’re doing for you and your portfolios.

Your comments and questions are always most welcome.

*I’ll spare you the names of some of those companies that are currently surging because it’s not unlikely they’ll meet that same eventual fate, perhaps even by the time you read this.

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