September is a notoriously difficult month for the markets. It has been consistently difficult in many years, but we were hopeful this year would be different with the Coronavirus interrupting our normal lives and habits. Since the lockdowns in March, there has been a tremendous pick up in retail investors, who now make up 25% of invested assets. Traditionally, retail investors have exacerbated market trends. Retail investors, generally speaking, tend to buy and sell at the wrong times (buy high and sell low). The unofficial final week of summer wasn’t a very good one for the type of stocks that dominated the market's performance for much of the last several months. Last week, the year’s best performing names (popular with retail investors) underperformed the year’s worst performing names (stocks that are not on retail investors radar) by roughly 4 percent. Technology stocks like Tesla and Apple have done nothing but go up over the last several months with really no fundamental rationale other than retail investors were pushing them higher. The current selling pressure in technology may continue for the next few weeks until Tech gets back in line with the broader market.
U.S. payroll employment rose +1.371 million m/m in August, which puts the level of nonfarm payrolls at 140.9 million. The peak was 152.5 million in Feb, with the low point at 130.3 million in April. We’re halfway back. In a typical recession, nonfarm payrolls would be roughly -2% below peak after 15 months, which would be the bottom. That -2% equates to about -3 million jobs today. We are six months into the 2020 downturn, so over the next 9 months, we would need to rise to 152.5*0.98 = 149.4 million on nonfarm payrolls. That’s almost +950,000 per month. This is getting harder with permanent job loss rising. The payroll hit has not had a bigger impact on the economy & credit markets since income replacement (fiscal stimulus) has appropriately cushioned the blow. The end to some of these benefits looks to have boosted the search for work in Aug.
Nonfarm payrolls beat the consensus expectation and the unemployment rate dropped to 8.4%, well below the peak of 14.7% in April. Expectations have risen for Q3 GDP to come in between 25 to 30% annualized growth. Both the growth in Employment and GDP are much better than experts predicted months ago at the start of the Pandemic's economic shutdown. As a point of reference, it took 3 years after the financial blowup in 2009 to get the unemployment rate back below 8.5%. We continue to watch for another fiscal bill from D.C. in the second half of the year to aid consumers and (importantly) state & local governments. This is still our base case, as the economy is healing but fragile.
Last week was the worst week for equities since June. Last week’s return was -1.00% for the S&P 500 Value index which bested the -3.07% return for the S&P 500 Growth index. Utilities and Materials were the only two sectors that were positive, while Energy and Technology both returned worse than -4%. According to the St Louis Fed, their 5-year inflation expectation hit a high for the year at 1.91% which helped to spur Materials as the top performing sector. The three best materials names in the S&P were Eastman Chemical Co., LyondellBasell Industries, and International Paper Co., all returning over 5% last week. Inflation expectations couldn’t help support oil prices as Crude fell from $42.97 to close the week below $40 for the first time since July. Energy names HollyFrontier Corp. and Diamondback Energy Inc. both tumbled over 10% last week as energy prices depressed the expected future profitability in the names. There were twelve information technology stocks that returned worse than -6% last week. During trading on Friday, the high growth technology trade was in full meltdown after the Nasdaq 100 index started down 5.34% before retracing most of those losses as the index closed down 1.27% for the day. There were some reopening trades that were positive last week. Carnival Corp. and Norwegian Cruise Line Holdings rallied 7.67% and 4.13% respectively after news broke that Italy based Costal Cruises will resume operations starting Sunday. Walmart Inc. returned 1.80% last week after announcing an unlimited delivery service called “Walmart Plus” to compete against Amazon Prime. It is expected to have 2,700 stores offering same-day delivery later this month. Beverage conglomerate Brown-Forman Corp. rallied 9.10% last week after announcing earnings that bested market expectations on sales that grew 3% when analysts had estimated -5% sales growth. Despite the poor week inequities, the S&P 500 index is still above where it was only two weeks ago. Consider dips like this an opportunity to assess your market allocations and an opportunity to buy assets at lower valuations.
Source: Strategas, First Trust
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark the performance of specific investments
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