Market Update September 2020 – Confident Markets Without the Consumer’s Confidence?

CAPITAL MARKETS

It was bound to happen.  Since the March low, the equity market’s rebound had provided gains each month through August.  But September saw a pause as investors took a break to assess where the global economy stood following five-plus months of higher prices.  And there has been plenty to consider.

First, not all stocks had been invited to the party.  At the recent September 2, 2020 peak of the S&P 500 Index, the index was 5.8% higher than its previous high on February 19, 2020.  Yet, 288 of the index’s stocks remained below their respective February highs.  With this in mind, it is not surprising that the S&P 500 Equal Weighted Index (all stocks in the index held at the same weight) remained 2.5% below its February 19, 2020 level.  Following this peak, the S&P 500 Index declined 6.9% through September 30 while the equal-weighted index declined 4.9%.

Second, gains during 2020 can be attributed to price-to-earnings or “multiple” expansion.  Or, stating the obvious in other words, as business has grappled with the effects of the COVID-19 pandemic, price appreciation has not been supported by current earnings growth but has been driven by optimism for 2021.  Survival has been a good place to start for many businesses, but those with expected earnings growth during 2020 are a small group.  This dynamic is not necessarily a bad thing as stock prices always reflect investors’ opinions regarding future price levels.  But this does set up a high expectation for continued recovery in 2021 with potential ramifications if next year disappoints investors.  Which leads to the election…

To date, the general market opinion has been that if the current administration retains the White House, policy will continue to be business friendly.  Or, if there were to be a Democratic sweep of the White House and Congress, policy would likely include tax reform resulting in higher rates for at least a portion of certain individuals and businesses.  And these higher tax costs have, historically, cut into consumer spending and business profits, a scenario that would challenge high equity market valuations looking for a continued rebound in earnings growth in 2021.

But, as the election campaign has progressed, a different paradigm is beginning to evolve.   If there is a one-party sweep of the White House and Congress, either party would likely move to initiate additional fiscal stimulus measures.  And since 2009, markets have been pushed higher as these measures enter the economy and capital markets.  The likelihood of a Republican sweep is low, but, if there were to be a Democrat sweep, would current economic conditions suffice to slow the pace of implementation of higher tax rates?  Could tax reform create a base for additional economic support through further fiscal stimulus?  The jury is out on the conclusions, but the stakes are high for either party’s first steps, post-election.

CHART OF INTEREST – Confident Markets Without the Consumer’s Confidence

For some time, the mood of the consumer has appeared to be linked to the direction of the equity markets.  Or, the equity markets have behaved in-line with the confidence of the consumer.  Chicken or the egg?  Regardless, the chart below suggests a correlation between the two, which does seem intuitive.

Looking at this relationship over the past decade, the US equity market (represented by the S&P 500 Index) and the Conference Board Consumer Confidence Index appear to have moved together, advancing in a relatively similar path through mid-2019.  But, since the latter half of 2019, divergences have begun to appear.  Most obviously the post-March rebound in the stock market has not been accompanied with a similar rebound of the consumer’s confidence.  And given the events of 2020, caution from the consumer is certainly understandable.  Yet, the markets’ confidence in the policy-makers ability to navigate the storm has outpaced that of the consumer. 

History suggests that the path of these two items would converge once again, most preferably with the consumer regaining their pre-pandemic confidence.

Quantitative Advantage, LLC (QA) is an investment advisor registered with the Securities and Exchange Commission and is a limited liability company organized in the state of Minnesota.  Registration of an investment advisor does not imply any specific level of skill or training. QA Wealth Management is a division of QA.

This information has been prepared by QA, is provided for informational purposes only and does not constitute investment advice. It contains general information, is not suitable for everyone and is subject to change without notice. The views and opinions expressed in this report are solely those of QA and are current as of the date of writing.  While the content is provided in good faith to provide a general commentary of current market factors and conditions, the views and opinions expressed are limited in scope and QA makes no representation or warranty as to the accuracy or completeness of the information provided. Past performance of the global investment markets is not a guarantee of future results.

The index performance results referenced in this report represent past performance and are not a guarantee of future performance. Investment returns and principal value will fluctuate and are subject to market volatility, so that a client’s investment, when sold, may be worth more or less than the original cost. Indices are unmanaged and investors cannot invest directly in an index. An index’s performance does not reflect the deduction of transaction costs, management fees, or other costs which would reduce returns.

The S&P 500 Index is a stock market index based on the market capitalizations of 500 large companies having common stock listed on the New York Stock Exchange or the NASDAQ Stock Market.

The S&P 500 Equal Weighted Index (EWI) is the equal-weight version of the widely-used S&P 500 Index. The index includes the same constituents as the capitalization weighted S&P 500 Index, but each company in the S&P 500 EWI is allocated a fixed weight of 0.2% of the index total at each quarterly rebalance.

For more information about QA, its investment programs, fees, and the risks associated with the investments which QA may make or recommend, please review QA’s Form ADV disclosure brochure, which is available at www.QAwealthmanagement.com, or upon request from QA’s compliance department by telephone at 866-767-8007, by writing to 10400 Yellow Circle Drive, Suite 303, Minnetonka, MN 55343, or by email to compliance@QAwealthmanagement.com. Please review the Form ADV disclosure brochure carefully before or at the time you enter into an agreement with QA.

2738-0920