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

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