July 2020 Market Commentary
Ethan Pollard | August 05 2020
Equity markets continued their recovery from the COVID-induced losses of the first quarter, with US stocks climbing back into positive territory for the year. The S&P 500 index, which tracks the performance of the 500 largest domestic stocks, gained +5.6% in the month of July and is now up +2.4% year-to-date. Overseas equities gained +4.5% in July per the MSCI ACWI ex-US index, which is still down -7.0% YTD. Elsewhere, bond markets continued to benefit from falling interest rates, as the Barclays US Aggregate Bond Index gained another +1.5% on the month (+7.7% YTD). Gold prices surged +11.1% in July to an all-time high closing price of $1,974/oz. Spot prices have rallied +29.7% year-to-date.
While uncertainty abounds over the path of the COVID-19 pandemic and a US presidential election that creeps ever closer, our firm continues to focus on the data, which shows incremental improvement from the lows of the first half of the year. Below is a primer on each of our Three Dials through the end of July:
- Market Sentiment and Momentum: Positive (upgraded from Neutral last month)
July marks the fourth consecutive monthly gain for most major equity indexes. We are encouraged by improving breadth across equities, meaning that it is no longer just a handful of hot tech stocks that are spurring the market rally, in addition to declining volatility levels. As such, our Momentum Dial has returned to a “Positive” reading.
- Economic Fundamentals: Negative (unchanged from last month)
With last week’s advance GDP estimate release from the Bureau of Economic Analysis, we can now say that the US experienced its worst quarter of economic growth since the Great Depression. The economy shrank by 9.5% in real terms during Q2, which amounts to a 32.9% annualized decline. While consensus estimates point to a rebound for Q3, it could be until 2022 that we see new highs in economic activity. Given the hard work that remains ahead for our economy to heal, our Fundamental Dial remains in a “Negative” position.
- Valuation: Negative (unchanged from last month)
Despite strong price action, the S&P is currently on track for a 36% decline in year-over-year earnings, which contributes to an ever-widening valuation gap. While earnings should recover from their low base, a material risk of a price correction remains, which keeps our Valuation Dial in a “Negative” position.
On balance, our Three Dials composite reading points to an investment landscape that is improving as we move further from the worst of the COVID crisis. That said, continued caution is warranted as plenty of obstacles remain before we see a return to full health. As always, we are monitoring new data as it becomes available and will communicate any changes to our outlook.
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