In the financial markets, hindsight is forever 20/20, but foresight is legally blind. And thus, for most investors, market timing is a practical and emotional impossibility. – Benjamin Graham
The major stock averages continued to climb higher last week although the gains were much more modest than in the prior week. There really weren’t any specific catalysts for the rising stock prices as the S&P 500 Index now stands within just 0.4% of its record high set back on February 19th. Since putting in a low on March 23rd as a result of the economy shutting down due to the coronavirus, the benchmark has risen more than 50%, a remarkable achievement considering that millions of people have lost their jobs and economic growth remains weak. Much of the credit for the rebound in stock prices has to go to both the Federal Reserve and the federal government as trillions of dollars have been spent to stimulate the economy and keep interest rates low. There is still optimism that additional economic relief will be passed by Congress, but as of last week, Republicans and Democrats were no closer to reaching an agreement with talks likely put on hold until after Labor Day as House and Senate members are in recess. President Trump’s executive orders aimed at extending coronavirus relief to Americans were partly designed to put pressure on Congress to reach a deal but even these measures are likely to face legal challenges. As far as the second quarter earnings season goes, the news continues to be upbeat as nearly 90% of S&P 500 companies have now reported their earnings and about 81% of them have beaten analysts’ estimates. Economic news last week was also somewhat encouraging as weekly jobless claims fell to 963,000, below 1 million for the first time since the pandemic began almost five months ago. Even though negotiations over a new stimulus plan are at a stalemate, Goldman Sachs raised its economic growth outlook, too. This positive news caused economically sensitive stocks and cyclical names to outperform last week as investors rotated out of technology stocks into stocks that will benefit from an improving economy.
Retail sales in July rose less than expected but excluding automobiles, retail sales were better than forecast and rose to a record level, gaining back what was lost in the pandemic. Both the producer price index (PPI) and the consumer price index (CPI) increased more than expected in July due mostly to higher gasoline prices, but the PPI is down 0.4% during the past 12 months and the CPI is up just 1% over the past year as inflationary pressures in the economy are largely nonexistent.
The Big Ten and Pac 12 athletic conferences postponed their college football seasons in the fall due to concerns over the coronavirus pandemic while the SEC, Big 12 and ACC conferences have indicated they will play, at least for now.
For the week, the Dow Jones Industrial Average jumped 1.8% to close at 27,931 while the S&P 500 Index rose 0.6% to close at 3,372. The Nasdaq Composite Index edged up 0.1% to close at 11,019.
Housing starts and existing home sales in July are both expected to exceed numbers reported in June as the economy continues to slowly recover and interest rates remain at historically low levels. Leading economic indicators for July are expected to be positive but half as much as they were in June.
The Federal Open Market Committee (FOMC) will release minutes from its most recent monetary policy meeting, which could provide clues about the Fed’s future policy moves.
Retailers will dominate this week’s quarterly earnings reports as Home Depot, Lowe’s, Walmart, Target, Kohl’s and TJX Companies are scheduled to report. Other companies on the agenda include Analog Devices, Nvidia, Agilent Technologies and Deere.
The dramatic rebound in the S&P 500 Index from the abyss on March 23rd when it was below 2,300 to last week when it closed at 3,372, within 14 points of its all-time of 3,386, is remarkable given the current weakness in the economy due to Covid-19. In many ways, the rally in stock prices has been too far, too fast as there seems to be a disconnect between the fundamentals of the real economy and the stock market, which is currently trading at 26 times expected earnings compared to the historical average price earnings ratio of only 15 or 16. Not only are equity valuations high, the bond market is also overvalued as the 2-year Treasury yield is only 0.14% while the 10-year Treasury yield is a paltry 0.71%. For these reasons, investors would be wise to look overseas, especially at European equities, which have much lower price earnings ratios than their U.S. counterparts. Europe has been more successful at controlling the spread of the coronavirus and, as a result, has been able to reopen its economy faster and more safely. European Union leaders have also agreed to billions of dollars in coronavirus relief and have been willing to provide fiscal aid to countries in an emergency. This signals a move towards fiscal coordination and cooperation and should reduce the risk associated with its currency, the euro. Furthermore, unlike the U.S., Europe has a trade surplus and a rise in the value of the euro could produce higher equity returns for U.S. investors. A major reason that the S&P 500 Index has done so well is the performance of the technology sector, particularly the stocks of Facebook, Apple, Amazon, Alphabet (Google), Netflix and Microsoft, which are responsible for about a quarter of the year-to-date return of the benchmark. European stocks have underperformed partly because the technology sector is less important and carries less weight. With relatively high U.S. equity valuations and the potential fallout of excessive monetary and fiscal stimulus, investors would be wise to include a developed markets international fund with ample exposure to Europe in their portfolio.