Market Update: Aug 06 2020
- Earnings Reports
- Tech Stocks
- Potential Upcoming Risks
Here is a recap of our live Q&A session held on 8/06/20 presented by Joe Randazzo JD, CFP® from FNA Wealth Management and Dave Stone CPA, CFP® from Tartan Wealth Management.
Details for our next session, August 13, can be found here.
You cautioned last week on this call about volatility following earnings, especially the tech sector. Can you expound on that now that we’ve seen what we have the last week?
Like many, we were somewhat surprised by the magnitude of the earnings beat to the upside. Clearly, the stock markets rewarded companies like Apple, Amazon, and Nvidia. This doesn’t change our expectation of increased volatility in challenges in the stock market, especially in the tech sector. In hindsight, the “stay at home” companies benefited significantly from the CARES Act. Remember many people have been receiving $600 a week from the federal government on top of their state unemployment benefits. While there is a strong indication that savings rates went up, we are also seeing that money typically spent in restaurants, travel, etc. throughout the summer was otherwise spent on technology like streaming services, video rental, and new hardware. We’re not in the business of predicting, but with that Federal subsidy being reduced and other areas of the economy starting to open, I continue to believe the tech sector slows down in the short term as spending is likely diverted to other areas.
So, we continue to caution against chasing returns in the market and to preach dollar cost averaging and rebalancing.
What are the major risks we should look out for in the next 12 months?
There are many reasons to be cautious over the next year, not the least of which is the current valuation of the markets. That said some specific issues we’re watching closely and would advise caution around are:
- Corporate earnings not living up to expectations – as suggested earlier, we believe corporate earnings have posted as strongly as they have largely because of the CARES Act and the stimulus checks that have been cut over the last 5 months. We’ve said it before on this call, and we’ll say it again – we firmly believe the market has priced in near-perfection with corporate earnings. As COVID cases continue to rise, school begins, and economies continue to open, we believe fund will likely be diverted from the ”stay at home stocks” that have carried the indexes so far.
- Tightening on fiscal policy ($600 checks have run out, will have to see soon what happens) – we don’t expect that support to dry up completely, but more likely to land somewhere between the $200 the Republicans proposed and the $600 the Democrats want to continue.
- A Democratic Sweep (Especially if Elizabeth Warren is the new Treasury Secretary. We believe you could see the repeal lots of pro-business tax cuts) – the election is a wild card right now and current polls are likely not a good indication of what is to come. That said, and political affiliations aside, we do believe rather strongly that a Democratic sweep would cause more volatility in the markets than if the Republicans kept the White House or Senate
- COVID infection trend – Among other things, kids going back to school, flu season, and the timeline of the vaccine each play an important role in how this virus plays out. We’re watching closely for a leveling off of reported cases as each of these run their course.
The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Lincoln Investment. The material presented is provided for informational purposes only. Nothing contained herein should be construed as a recommendation to buy or sell any securities. As with all investments, past performance is no guarantee of future results. No person or system can predict the market. All investments are subject to risk, including the risk of principal loss. A plan of regular investing does not assure a profit or protect against loss in a declining market. You should consider your financial ability to continue your purchases over an extended period of time.