August 2020 Market Commentary

August was a surprisingly good month for the S&P5001.  Our expectations were just hoping to remain positive, but the index is now positive slightly more than 10% so far in 2020.  Certainly not wAugust was a surprisingly good month for the S&P5001.  Our expectations were just hoping to remain positive, but the index is now positive slightly more than 10% so far in 2020.  Certainly not what we expected to see after the 33.7% drop that occurred earlier this year (FastTrack data).

Not only did the S&P 500 get back to positive on the year, it is now (though just barely) pushing through to new all-time highs.  So, for now, things feel like they are getting back to normal.  At least in the stock market.

But wait, don’t we still have high unemployment?  A previously inverted yield curve?  Small businesses failing at an alarming rate due to COVID?  The answers are all still a resounding YES.  The only saving factor we can possibly see is the Federal Reserve doing all it can to keep things stable.  There is an old saying “don’t fight the Fed.”  So, we won’t spend too much time on the “why” question and stay focused on “what” is actually happening in the stock market. 

Some of the biggest investment mistakes I’ve seen were made based on beliefs about what “should” be happening in the stock market, rather than what IS happening.  That could be anything from who got elected to apocalyptic predictions that don’t materialize.  We often see that political conjecture can lead investors in the wrong direction, and fear-based thinking can often lead to poorly made decisions.  The stock market and economy have survived much more drama than what we are currently facing (not that we couldn’t test the limits in the future).  What this points out to us is that underlying beliefs can often be more of a problem than many investors realize.

In this month’s chart, let’s go back to the VIX chart we used earlier this year.  The higher than normal reading has us intrigued, as a “normal” (what is normal, anyway?) market has a reading between 12 and 15.  A “volatile” market tends to be above 20.  Seeing the value hold above 20 while the market remains in an up-trend is an unusual sight to see.  The lines on the chart show how historically, the market has had a tendency to peak at low VIX readings.  Right now, it is hard to gauge where we are based on the given information.  So, the VIX value is still improving but continues to suggest caution.  “Curiouser and curiouser!” – Alice in Wonderland

Bonds – the bond market has started to give back gains made this year.  The Aggregate Bond Index AGG is down around -1% for the month of August, and up just over 6.5% year to date.  Other bond segments, like High Yield, are still flat on the year and starting to stagnate.  
Bonds – the bond market has started to give back the gains made this year.  The Aggregate Bond Index AGG is down around -1% for the month of August, and up just over 6.5% year to date.  Other bond segments, like High Yield, are still flat on the year and starting to stagnate.  

For most of August, Shadowridge accounts have remained almost fully allocated.  However, in the previous week, we’ve started scaling back on our stock market exposure.  We are now seeing a divergence between money flow and the direction of the stock market.  At some point, we find the money flow will more than likely be the correct information to follow.  So, we’re still at the ready to get out of the market if we don’t see improvement there.

Hope you are staying safe and having a great summer,