After one of the strongest Augusts on record, investors continue to shake their collective heads trying to figure out a market that is doing so well when the COVID economy is in recession. As we discussed in our previous letters, the monetary support that the Federal Reserve and the fiscal stimulus by the Congress and Administration have provided the fuel to keep the markets and consumers liquid.
It’s worthy to note that these support and stimulus measures are significantly greater than those employed during the 2008 Financial Crisis. As an aside, if more were done then, it is my opinion that the recovery would have been much stronger. We still have a ways to go until we can determine a verdict on the government’s response but from a market’s perspective, investors are happy.
As with everything in life, there is more to it than meets the eye. While the S&P500 is back in the black for the year, this performance is skewed to the positive showing of the mega-cap technology and social media names. A majority of stocks are still far from even for the year. The top 10 companies in the S&P500 now make up approximately 30% of the index’s weighting. The implication is that investors may be less diversified than they think and as a result, the risk is higher.
Overall, with stock prices outpacing earnings, valuations in many parts of the market look stretched. Under these circumstances, the market is vulnerable to the downdrafts that we experienced this past week. Caution is warranted. With valuations high and an economy that, while improving, remains weak and reliant on government support, volatility will likely remain elevated.
As the election is moving into the final two months, there will be a lot of talk about how the election will impact the markets. I caution investors that even the selection of a President is but one factor in the many informational inputs for the market.
Far more important is to follow your financial plan, including appropriate re-balancing.
— Ian Green, Pendragon Capital Management