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