Market Update: Sep 03 2020
- Growth vs Value Stocks
- Market Expectations
- Protecting Gains
Here is a recap of our live Q&A session held on 9/3/20 presented by Joe Randazzo JD, CFP® from FNA Wealth Management and Dave Stone CPA, CFP® from Tartan Wealth Management.
Details for our next session, September 10, can be found here.
We heard this week that “jobs growth stuck in neutral“, and Dr. Fauci believes Covid cases are unacceptable and projecting them to get worse. Yet, once again, the markets are rallying by hundreds of points a day. Is this sustainable and what do you expect in the coming weeks?
I don’t believe for a second the current trajectory is sustainable, especially on the growth side of the equation and in technology. Take Zoom for example. Zoom announced earnings earlier in the week and quadrupled revenue. As a result, their stock jumped around 45% in one day. However, the stock had already more than doubled in anticipation of those numbers. That’s like giving a winners check at the Masters before the tournament to the player you think is going to win, and then giving another check to him when he wins. At some point, you likely have to give some of the money back. As we’ve said before, momentum is a real phenomenon when it comes to investing, so there’s really no telling when it will run out and things will turn around. But we simply believe that they will.
When we look at growth versus value and a differential of roughly 40% performance between the two, we have to remember that this recovery of the indexes has been just that…a recovery of indexes. An overwhelming majority of stocks in the S&P 500 index are still well below their 52 week high, while a small handful are breaking records by the day. We can’t lose sight of the fact that much of the economy is still in disarray, the jobs numbers have stalled, and that there is still a lot of uncertainty surrounding stimulus. For all these reasons, we stay the course and continue to manage risk as much as returns.
What are your expectations for the stock market over the coming weeks?
We have seen the stock market continue down the path of the big tech companies driving returns this year. The S&P 500 was up 7.0% in August which is the best August performance since 1986. The S&P 500 has been positive every month for the last 5 months and has now rallied over 60% from the market low of March 23, 2020. The growth vs. value spread is getting wider each week over the last month. It appears that investors have looked upon the big tech names as their safe investment. When economic news is less than favorable the big tech and the “stay-at-home” stocks we have discussed have led the market.
These are the things to watch over the next few weeks:
- The stalemate in Congress over latest stimulus package. How long will it be until a deal is done?
- COVID 19 cases seem to be stabilizing in many states. Some universities that were in-person have already shifted to on-line. Does this trend continue?
- -Will growth vs. value difference continue to widen?
- The election is 2 months away. We believe that the markets will become more volatile over the coming weeks.
- Will the stock market experience a pull-back after reaching new highs this week?
These are only a few of the issues that could impact the markets and create more volatility over the coming months. We think it is likely that the market could pull back 10-15% over the next few months. Therefore, if investing at this time is appropriate for you, it is recommended to continue to dollar cost average in to the markets.
What can I do to protect stock market gains achieved over the last few months?
In order to help protect stock market gains, investors could implement one or more of the following:
- Sell stocks to protect gains and hold proceeds in cash – be cognizant of any tax ramifications.
- Rebalance holdings to lower stock allocation – this can also have tax ramifications.
- Invest in options that serve as a hedge to stock positions – this has increased risks, and you should discuss with a financial advisor prior to investing.
- Invest in structured products that provide a downside buffer – like options, structured products can be complicated.
There are advantages and disadvantages to these and any investment strategy. Please contact us to discuss your specific situation, and we would be happy to help you choose a path.
The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts or 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. 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.
S&P 500 Index is an index of 500 of the largest exchange-traded stocks in the US from a broad range of industries whose collective performance mirrors the overall stock market. Investors cannot invest directly in an index.
Growth funds focus on companies that managers believe will experience faster than average growth as measured by revenues, earnings, or cash flow. While growth funds are expected to offer the potential for higher returns, they also generally represent a greater risk when compared to value funds. They tend to do better than the overall market when stock prices in general are rising, while underperforming the market as stock prices fall, taking into account that past performance does not guarantee future results.
The goal of value funds is to find proverbial diamonds in the rough; that is, companies whose stock prices don’t necessarily reflect their fundamental worth. In searching for these companies, managers look for what many experts call a “margin of safety.” This means that the market has discounted a security more than it should have and that its market value, the price at which it is trading, is less than its intrinsic value, the present value of its future cash flows. In general, value funds focus on perceived safety rather than growth, often investing in mature companies that are primarily using their earnings to pay dividends.
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.