Don't Give Up On The Turtle
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The S&P 500 Index was down -19.4% in the first three months of this year. It then gained +21.6% in the next three months plus, leading into the July 4th holiday, leaving the index down -2.1% for the year. That is a great example of stock market volatility, and while the first half of this year may have been a bit extreme in both directions, we lay out below our reasoning for the likelihood of more of it to come.
But first, let’s address why stocks bounced back so strongly given all of the negative headlines, virus cases, job losses, potential bankruptcies, etc. One reason is simply that the Fed stepped in with fiscal and monetary stimulus programs that were massive, to say the least. Monetary stimulus calmed the bond market, which then helped stabilize the stock market, and fiscal stimulus sent the added message that the Fed will support the consumer and the economy. Investors yelled “don’t fight the Fed”, and stocks rallied.
So where do we go from here? Well, however optimistic or pessimistic you are for the near term, you probably have company. The chart below shows that even the “experts” really don’t know what to expect from the market over the next two quarters
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Making a six-month prediction on the stock market is not what we should do anyway. As investors, we should care more about what to expect over the next several years, not months. In addition, do you really want to try to position your portfolio based on which of the three presidential candidates might win? (Yes, we included the recently announced Kanye West). Better yet, we’ll address the election a different time.
While there are uncertainties abound as we move into the second half of this year, we point to a couple pieces of the puzzle that gives us reason for optimism. A recovery of some form appears to be underway for the economy as states open up, and workers are called back. The hope is that this does not result in a spike in virus cases that could cause another shutdown. We will see. Another consideration is that, while second quarter earnings are widely expected to be down, some analysts have been increasing their estimates for future earnings, which is what ultimately determines the price of a stock. Importantly, these upward revisions are not just for U.S. companies. The chart below shows that some analysts have been increasing their estimates for companies around the world
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. This is encouraging for both U.S. and global investors.
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The stock market discounts future expectations, and it can be argued that recent stock performance is discounting some pretty high hopes. The stock volatility that we think we could experience could come from high expectations not being met, or a surprise spike in virus cases, or a delay in a vaccine, or something not being thought of currently. It doesn’t mean that any disappointment automatically leads us back to the March lows. In fact, stocks could just tread water for a time, while fundamentals become clearer. We do wonder, though, how many investors have become complacent.
The chart below summarizes stock performance year-to-date by market cap (large, mid, small) and by style (value, blend, growth)
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. The S&P 500 Index is large cap blend.
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Performance thru 7/3/2020
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As you can see, large cap growth has been the place to be, outperforming all other styles this year, and this is a repeat of the past couple of years. It is to the point where many investors are wondering why they should invest in anything else. There are many good companies that fall into each of these boxes. Their stock prices may eventually indicate that. Recent option activity and data from various companies indicate traders may not be not interested in waiting. Patient investors may be rewarded.
Finally, recent stock market action reminds us somewhat of the Tortoise vs. the Hare. The Tortoise (named Diversification, and nicknamed Rebalance) kept his focus on the long-term goal, even through rough patches, executed it’s plan, and won. The Hare (named FOMO) sprinted to large leads, laughed at the turtle, and eventually made poor decisions and experienced regret. Traders bet with the rabbit. Investors side with the turtle. We like the turtle.
As always, thank you for letting us help guide you toward your financial goals!
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Gary Orf, CFA
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Chief Investment Officer | Renaissance Financial
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St. Louis, MO | Omaha, NE | Kansas City, KS | Lincoln, NE | Chicago, IL | Phoenix, AZ
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i
Cypress Capital, July 2, 2020.
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Charles Schwab, July 5, 2020.
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JPMorgan, July 6, 2020
iv Style box returns based on Russell Indexes with the exception of the Large-Cap Blend box, which reflects the S&P 500 Index. All values are cumulative total return for stated period including the reinvestment of dividends. The Index used from L to R, top to bottom are: Russell 1000 Value Index (Measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values), S&P 500 Index (Index represents the 500 Large Cap portion of the stock market, and is comprised of 500 stocks as selected by the S&P Index Committee), Russell 1000 Growth Index (Measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values), Russell Mid Cap Value Index (Measures the performance of those Russell Mid Cap companies with lower price-to-book ratios and lower forecasted growth values), Russell Mid Cap Index (The Russell Midcap Index includes the smallest 800 securities in the Russell 1000), Russell Mid Cap Growth Index (Measures the performance of those Russell Mid Cap companies with higher price-to-book ratios and higher forecasted growth values), Russell 2000 Value Index (Measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values), Russell 2000 Index (The Russell 2000 includes the smallest 2000 securities in the Russell 3000), Russell 2000 Growth Index (Measures the performance of those Russell 2000 companies with higher price to-book ratios and higher forecasted growth values).
Past performance does not guarantee future results.
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or stocks in particular, nor should it be construed as a recommendation to purchase or sell a security. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested.
Neither asset allocation nor diversification guarantee against loss. They are methods used to manage risk.
The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S. Please note an investor cannot invest directly in an index.
The MSCI World Index measures the performance of the large- and mid-cap equity market across 23 developed markets countries. It is a free float-adjusted market-capitalization weighted index.
Investments in small, mid or micro cap companies involve greater risks not associated with investing in more established companies, such as business risk, stock price fluctuations, increased sensitivity to changing economic conditions, less certain growth prospects and illiquidity.
Securities and investment advisory services offered through Securian Financial Services, Inc. Member FINRA/SIPC. Renaissance Financial is independently owned and operated. 5700 Oakland Avenue, Suite 400, St. Louis, MO 63110
3152431 DOFU 07/2020
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