It feels like this recent rally, rebound, bounce (whatever you want to call it) is running out of steam. One of the most common indexes that reference the performance and health of the overall stock market, the S&P 5001, still can’t seem to go positive this year. As of Thursday, June 25th, 2020, that index is still down -3.50% (FastTrack Data).
So what’s an investor to do? The outperformance of any strategy this year (to be at or better than the S&P 500 mentioned above) comes from allocating to the stronger sectors or markets and avoiding those lagging.
For example, the Small Cap Index (Russell 2000: IWM) is down -14.62% (FastTrack Data). If you are “diversified” between the S&P 500 and the Russell 2000, then it’s likely you are seeing larger losses year-to-date.
But the NASDAQ 100 index is up +16.18% for the year and is a rare bright spot that has recovered quickly from the ugliness in February and March. So, if your account is allocated more in NASDAQ, it’s likely your account is holding up well, or even beating the S&P500 benchmark.
As an active manager, this is how we have been allocated for a while, and the majority of our accounts have benefitted from this discernment. As I’ve said, the rebound seems to be running out of steam, and I’m not sure if there is enough conviction behind it to keep things moving upwards through the summer. We’ll keep an eye on that.
All that being said, our models and allocations have focused on either being defensive or in the stronger markets. The NASDAQ 100 has been a core holding this year, and it’s keeping us largely positive (or very close) while much of the market is struggling. This is where we believe being active pays off.
The VIX (Volatility Index) has been creeping higher since last month as well. It is currently around 32, when one month ago it was around 28. To give you context, a normal bull market has a reading somewhere between 12 and 15. So to me, this suggests we’re not out of the woods yet on market craziness, and investors are still on edge about a possible decline.
In this month’s chart, we look at the U.S. unemployment numbers over the past 20 years. Looking at both the Tech Bubble bursting in 2000-2002 and the Housing Bubble bursting in 2008, the recent spike in unemployment far exceeds what we saw in both of those situations (see chart below). As the U.S. economy (tries to) open back up, this number could normalize at a lower level. But in any case, rising unemployment was, to us, the final straw to usher in a recessionary cycle. We believe we may be at the beginning of this cycle. What to watch now is where it lands once things settle. But who knows at this point when that will happen?
Bonds – the bond market has managed to keep its calm since it had its own temper tantrum in March. The Aggregate Bond Index AGG is only slightly positive for June, but doing well so far this year: the AGG is up almost to 6% year to date, while many of the harder-hit bond areas (like High Yield and Muni Bonds) are still struggling.
As the first half of 2020 comes to a close, we reflect that we could not have imagined the struggles and difficulties the world has seen this year. But, as with all human struggles, we keep going. It’s been inspiring to see some of the creative and caring acts that have occurred over the past several months. And as for the stock market and our clients’ accounts, we will remain vigilant as always, and keep hope for brighter days eventually.
Wishing you a safe and healthy summer,
1 The Standard and Poor’s 500 is an unmanaged, capitalization-weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.
2 Charts are for informational purposes only and are not intended to be a projection or prediction of current or future performance of any specific product. All financial products have an element of risk and may experience loss. Past performance is not indicative of future results.