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The Market: July/August 2020

Twice in the past month, the bears took the S&P500 down to the 200 day moving average but both times failed to break the market lower. The buyers came in and bounced the S&P500 back up to 3130. This is about where stocks are now. The stock market seems to be trading in a range with the 200 day moving average at the lower bound and about 3200 at the top. The lower bound appears for now to be maintained by the expectation of the Federal Reserve doing “whatever it takes” to bridge the economy until a COVID vaccine is developed. The top is, for now, limited by a market that is trading at a high multiple with uncertain corporate profits. Next week, companies will begin to report their earnings for the 2nd quarter. I’m not sure what new information investors will get. We all know that business was down sharply for most industries. Investors are likely to look past the numbers in anticipation of better days. There are two sectors that may prove to be an exception. The first is the high fliers. Companies like the FAANGs. Stock prices for these companies have been strong and expectations high. If there are disappointments, there could be a correction in these names. The second group of stocks to watch is financials. Their reports should provide some insight into the health of “Main Street” and credit quality of loans in the banking system. Bank stocks have been performing poorly. With legitimate reasons, expectations are low. There are long memories of the 2008 financial crisis and there are presently a lot of loans in forbearance due to COVID. How many of these loans that are on pause that will ultimately go bad is a big question for the coming quarters. If there will be surprises it will be in the FAANGs (and the other COVID-era favorites) and in the banks. Will any earnings surprises move the market out of its trading range? A lot will depend on whether additional stimulus is provided by the government. A falling stock market would likely push Congress and the President to further open the coffers, especially in an election year. — Ian Green, Pendragon Capital Management

The Market: June 2020

The stock market had a big up week as an economy that is re-opening, hopes for a vaccine and the fear of missing the rebound motivated investors to buy. While the initial rally off the March low was led by social media stocks, the FAANGs and technology, the past two weeks have seen a broadening of the advance. The optimism over the rebound brought the buyers to the banks, travel stocks and cyclical industrials. Last week was really a catch up trade for many of the hardest hit areas of the market. The small-caps performed well last week with the Russell 2000 Index up 7.1%, outpacing the S&P500’s 4.6% gain. Even with an impressive week, small-caps are significantly behind large-caps for 2020, by about nine percentage-points. There are valid arguments for the laggards to continue to catch up. An important one is investment manager career risk, meaning that for those managers who have missed the recovery rally, stocks that have lagged are reasonable ways to catch up to peers. Managers don’t want to miss their benchmarks for fear of being fired. The Nasdaq-100 has already recovered to it’s pre-lockdown levels. The Financial ETF is still 15% off its high. The Regional Bank and Industrial ETFs are 20% and 12% off their 2020 highs, respectively. As we move forward, the market will have to continue to climb a wall of worry. New cases of COVID are likely to rise as the states re-open. Whether the public or the authorities will care is another question. We’ll find out soon enough if our society has lost interest in the Coronavirus. While momentum is on the side of the bulls, the market has moved up very quickly. Right now, over 90% of stocks are above their 50-day moving average. How much fuel is left in the tank? With all the central bank liquidity, maybe a lot. Investors should be cautious and keep to their discipline and allocation targets. Trimming positions that have gone up a lot and resisting the temptation to reach for returns are valid. Nothing goes up in a straight line. — Ian Green, Pendragon Capital Management