August 2020 Stock Market Commentary
Ethan Pollard | September 04 2020
Equities logged their fifth consecutive monthly gain in August, with blue-chip US stocks continuing to lead global markets higher. The S&P 500 index, which tracks the performance of the 500 largest domestic stocks, advanced +7% on the month for a year-to-date (YTD) gain of +10%. Technology stocks, which have been the key benefactor of a more distanced post-COVID world, have led all sectors with a +36% gain YTD and powered the S&P to another record monthly close. Overseas equities gained +4% in August, per the MSCI ACWI ex-US index, which is still down -3% YTD. Elsewhere, bond markets backed up slightly. The Barclays US Aggregate Bond Index fell -1% on the month (+7% YTD) as interest rates rose at the long end of the curve. Gold prices moderated after breaking the $2,000/oz barrier in August, falling -0.4% on the month, with spot prices now up +29% for the year.
As the summer draws to a close, the investment landscape remains murky, with soaring stock prices amidst a backdrop of record unemployment and elevated valuations. As always, we parse the relevant data through our Three Dials lens; the Dials are summarized below and are unchanged from last month’s readings:
- Market Sentiment and Momentum: Positive
Equity markets continue to prove resilient in the face of a global pandemic, social unrest and political uncertainty. In fact, optimism over the short-term direction for stocks reached an 11-week high at the end of August, according to the AAII Investor Sentiment Survey.  As markets march higher, our Momentum Dial remains in a “Positive” position.
- Economic Fundamentals: Negative
Despite the bullish sentiment around the stock market, opinions regarding the underlying economy continue to languish. Small business optimism fell according to the NFIB’s most recent index reading, while consumer confidence has yet to budge from the depressed post-COVID levels according to the University of Michigan.   With upwards of a million new Americans filing for unemployment each week, we’ve yet to see enough from the economic rebound to alter our Economic Dial’s “Negative” reading. 
- Valuation: Negative
As equity prices have risen in the face of falling economic output, Warren Buffet’s famed Market Cap to GDP ratio has risen to its highest level going back to the indicator’s inception of 1970.  As lofty stock valuations tend to correlate with below-average returns, our Valuation Dial remains in a “Negative” position through the end of August.
On balance, our Three Dials composite reading has us slightly underweight risk assets heading into the last month of Q3. We continue to monitor this ever-changing environment for our clients and will communicate any updates on a timely basis.
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Disclaimer: Our intent in providing this material is purely for informational purposes, as of the date hereof, and may be subject to change without notice. This article does not intend to constitute accounting, legal, tax, or other professional advice. Visitors and readers should not act upon the content or information found here without first seeking appropriate advice from a trusted accountant, financial planner, lawyer or other professional.