Monthly Brief July 2020 – Never Say “This Time It’s Different”


Health concerns aside, the global equity markets continued to move higher during July.  In the U.S. the S&P 500 Index returned 5.6% in July but could not keep up with the Tech-heavy NASDAQ Composite Index’s July return of 6.9%.  Headline numbers aside, the real story was about the makeup of the stocks which led the month’s gains.

As markets have advanced over prior months, there has continued to be a narrowing of leadership.  The high-profile companies of Apple, Amazon, Alphabet (Google), Facebook, Microsoft and Tesla now account for over 40% of the NASDAQ Composite Index, an index that holds over 1000 companies, and these same companies make up 22% of the S&P 500 Index.  While the market caps account for a disproportionate amount of each index, their contribution to performance is even more lopsided as these six companies accounted for over 60% of the NASDAQ Composite Index’s return and 37% of S&P 500 Index’s return during July.

The debate regarding potential consequences of such a concentrated market continues to build.  One perspective is that the global pandemic has put a premium on companies, such as these, that are viewed as solutions and resources for the challenges the world faces.  Another point of view is that investors are chasing the leaders without regard for the premium being paid.  And some would take this as far as to say “recklessly” chasing returns.  In either case, this form of concentration in leadership has historically been a sign for investors to tread lightly, which is difficult as these market conditions can persist longer than expected. 

For now, a best-case scenario would be to see global economic growth data continue to be reported as better than expected (which sometimes shows up as “less bad” than expected) and for investors to begin a rotation towards a broader set of companies trading at lesser premiums.  Certainly, there have been historical cases of narrow markets having served as a warning sign of trouble ahead (e.g. the late 90’s “Dot-Com” market). But the unique aspects of the COVID-19 era suggest that no one historical period serves as a template for what happens next in current markets.As markets gauge the future, opportunistic investors will continue to focus on the degree of economic disruption posed by the pandemic.  And while we all hope for a solution to eradicate the virus, investors may continue to see optimism in the many global businesses that are learning to navigate the current challenges at hand – even while risks remain as the work continues to find stronger and more ultimate solutions to the global pandemic.

CHART OF INTEREST – Never Say “This Time It’s Different”

We are told to never say “this time it’s different”, but this time might be an exception.  The unusual looking chart below provides a stark picture of how different the current health and economic crisis conditions are in 2020.  

Going back to 1981, the chart’s blue datapoints are weekly bars representing initial jobless claims – the red bars indicate periods of recession.  While it is hard to distinguish any one week, the rhythm of claims around recessions and recoveries is evident.  Prior to 2020, as a recessionary period materialized, claims gradually increased as jobs were lost due to the slowing of the economy.  Generally speaking, claims of over 500,000 in a week were quite extreme.  And, as the economy recovered, claims gradually fell to their natural levels, consistent with the economic times.

In this context, the recent spike in weekly claims is truly remarkable and provides a picture of how unusual the current crisis is today.  Most striking is the sharp spike in claims over a two-week period in March 2020 when weekly claims went from 282,000 to nearly seven million claims filed in one week!  If there was a datapoint to provide perspective on how economically stressful this episode has been, this might be the one.

The unprecedented magnitude of this economic “hard stop” is certainly obvious in this data.  And it does support the creative policy measures enacted by global political, fiscal and monetary authorities.  While these programs will not be easy to unwind, exceptional challenges take creative solutions and this chart looks to have been calling for a “triage” approach to first “save the patient”, then work through to a recovery. 

While it won’t be easy to unwind programs that have been put in place, the economic-crisis picture evident in this comparison of 2020’s jobless claims to those of prior periods is certainly a vote supporting many of the policy measures enacted in recent months to help stabilize the global economy and capital markets.

James Ferrin, CFA
Chief Investment Officer

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