FAS Monthly Market Update July 2020

FAS Monthly Market Update July 2020

Posted By FAS Team


Economic Conditions

U.S. GDP decreased at an annual rate of 32.9% in the second quarter of 2020, according to the advance estimate released by the U.S. Department of Commerce, marking the U.S. economy’s worst period ever.  The decline in GDP in Q2 was steeper than any quarterly declines during the Great Depression and Great Recession.  For comparison, the worst quarterly decline prior to this reading was 28% in Q2 1921 during the Great Depression.  The worst quarter during the Great Recession was in Q4 2008, in which GDP fell 8.4%.

Personal consumption, which accounts for nearly 70% of GDP growth, contributed to 25% of the decline in Q2.  Despite the near 33% decline, Q2 results still beat economists’ expectations who were estimating a 34.7% drop in GDP.  New unemployment claims fell below 1 million for the week ended August 15 for the first time since the onset of Covid-19 in March.  With jobless claims currently at historically elevated levels, the trend appears to be moving in the right direction as the reopening continues.

In late-Q1, the economy experienced its steepest and swiftest decline in history.  Much of the damage was, in essence, self-inflicted given the decisions of public officials around the globe to shut down non-essential businesses.  Much of those decisions are reflected in the first half of Q2 while the gradual reopening of the economy is reflected in the second half.  For as swift of a pullback we experienced in the first half of the year, the economy is seemingly recovering at a similar pace as GDP growth expectations are estimated to be in the 20-25% range for Q3 which would set yet another record for strongest quarterly growth in history by nearly 10%.

Market Conditions

Markets didn’t let up from their recovery in July and have yet to slow down through the month of August as well.  The S&P 500 is nearing all-time highs and the NASDAQ breached its pre-Covid all-time high and continued to new highs in July and August.  The Dow Jones lagged compared to the other two major U.S. indices and remains down for the year.  Small caps continued to lag their large cap counterparts as well.  In fact, the biggest five technology stocks – Alphabet, Amazon, Apple, Facebook and Microsoft – now have a combined valuation of more than three times the market cap of the entire Russell 2000 small cap index.

The Russell 1000 (large cap) currently trades at approximately 22 times forward earnings while the Russell 2000 currently trades around 18x.  The consensus earnings estimates for small caps have improved by over 30% while estimates for the S&P 500 have increased by about 4%.  This could mean that small caps may be poised to outperform large caps throughout the rest of the year.  Despite outperforming large caps coming off of the bottom in late-March, small caps still significantly lag large caps year-to-date since their drop was much deeper.  The Russell 2000 was down over 40% from its February levels while the Russell 1000 was down 34%.  A 34% drawdown requires a 51% rise in order to breakeven, while a 40% drawdown requires a 67% increase to breakeven.  Valuations in small caps look relatively attractive compared to large caps, despite both being in higher ranges by historical comparison.

FAS in the News

Last week we sent an email to all of our clients sharing an article from an industry publication which featured our late founder, Max Greer Jr. and the legacy he created by formalizing his succession plan at FAS.  We felt it was important to share it again for those who may have missed the email or wanted to share it with friends or family.  We feel the author succeeded in illustrating not only the forward thinking business mentality of Max, but also of his immense generosity towards his employees and work family.  Every one of us is proud of what Max started with FAS and are genuinely excited when getting to share the history of our firm and Max’s story.  We hope you enjoyed this article as much as we did.

A Legacy of Uncommon Kindness and Shared Ownership Helped Build a $1.5 Billion RIA

Disclosures & Index Definitions

Under style performance boxes, indexes referenced in the equities section for large, mid and small reference the Russell 1000, Russell MidCap and Russell 2000 stock indices, respectively. The Barclays US Government, Barclays Credit and Barclays High Yield fixed income indices refer to Gov’t, Corp, and HY, respectively. Short, Intermediate and Long refer to the time frame of the investments and their positions on the yield curve.

The information and opinions stated in this presentation are not intended to be utilized as an overall guide to investing; nor should they be taken as recommendations to buy, sell or hold any particular investment. This presentation is not an offer to sell or a solicitation of any investment products or other financial product or service, an official confirmation of any transaction, or an official statement of presenter. The opinions and views conveyed are for informational purposes and make no recommendations in regards to how a client’s portfolio should be managed, as that involves inquiring, in depth, of a client’s or prospective client’s risk tolerance, investment objectives, time frame for investing and any other details pertinent to said client’s or prospective client’s financial situation. The presentation may not be suitable to be relied on for accounting, legal or tax advice.

Past performance is not indicative of future returns. Prices and values of investment vehicles will rise and fall as broad market conditions change. Investors’ portfolios may fluctuate, to varying degrees, in tandem with market conditions.  Diversification neither guarantees returns nor does it eliminate the risk of a portfolio decreasing in value. Equity securities tend to be more volatile than bond/fixed income products and carry greater risk factors than that of fixed income products. Smaller capitalization equities (i.e. mid and small caps) typically involve more risk than that of larger capitalization stocks. Political, economic, and currency risk are all risks subsumed under the additional risk factors of investments in international securities, to include  those in both developed and emerging markets. In addition, political conditions in emerging markets can tend to be more volatile than in those of developed markets.

Investments in bonds will be subject to credit risk, market risk and interest rate risk. Interest rates will have an inverse effect on prices of bonds. Bonds of lower credit ratings, also known as High Yield bonds which hold a rating of less than investment grade (BB+ and below), will have greater risks attached than will those of investment grade bonds and will experience greater volatility.

All dates are as of July 31, 2020 unless stated otherwise.

Presentation prepared by Financial Advisory Service, Inc., an SEC Registered Investment Adviser. Securities offered through FAS Corp., an affiliated insurance agency and broker/dealer.

Any dissemination, distribution, copying, or other use of this presentation or any of its content by any person other than the intended recipient is strictly prohibited. FAS only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses to this presentation that involve either the effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion.

Index Definitions

The S&P 500 Index is based on the market capitalizations of 500 large companies whose stocks are listed on the NYSE and NASDAQ. This is widely regarded as the single best gauge of large cap US Equities.

The Dow Jones Industrial Average  is a price-weighted average of 30 actively traded blue-chip stocks, primarily industrials. It is used as a barometer of how shares if the largest US companies are performing.

The NASDAQ is a market capitalization weighted index of the more than 3000 common equities listed on the NASDAQ Stock Exchange. These securities include American Depository Receipts, common stocks, real estate investment trusts, and tracking stocks.

The MSCI EAFE (Europe, Australasia, Far East) Net Index is recognized as the pre-eminent benchmark in the US to measure international equity performance. It comprises the MSCI country indices that represent developed markets outside of North America, Europe, Australia, and the Far East.

The MSCI Emerging Markets Index captures large and mid cap representation across 23 Emerging Markets (EM) countries. With 822 countries, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

The Barclays US Aggregate Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS, ABS, and CMBS.

All index information has been gathered from public sources who are assumed to be reliable, although we cannot guarantee the accuracy or completeness of those public sources.