Historically, July is, "nothing to write home about" as my dad would say. Out of the last 66 years, July has been positive for just 36 of those years. The average gain for July over those 66 years is a mild but positive 1.0%.
July of 2020 was definitely a huge exception to the historical trends of July's of the past. July of 2020 had the S&P 500 vaulting higher by more than 5%! Not only is this a stunningly high rate of return on its own, but July was also the best single month of any month for the S&P 500 since 2010.
People seem to be constantly asking, "What is making the market go up so much so fast?"
So what is the CRA view of what is driving markets to dizzying heights? It is certainly not the economy that is driving stock markets up! The momentum is there for stocks, but the fundamentals are simply not in place to support any momentum except to send stock prices lower currently. Corporate earnings are not rising in almost every sector of the markets. Sales are not really growing in most sectors of the markets. Corporate defaults on loans are starting to rise and bankruptcies by companies are rising.... so there is no support for these prices currently in markets to create or drive momentum. But, momentum seems to be in place currently nonetheless. Thankfully, some portions of some of our models factor in momentum elements as part of the CRA "read" on stocks and also on some bonds.
Is momentum all that is really pushing stock prices higher? At a few junctures over the last many many years, I have taken the occasion to point out/remind people that the stock market and the economy are certainly not one and the same., They are not really highly related to each other. They are not only not "twins" but they are not really even in the same family. You could possibly say they are first or second cousins but that is about as close as the stock markets and the economy are related.
This cartooned illustration below gives our basic sentiment as to what the real differences are between the posture of the stock market currently and the economy. Momentum is driving the market today but, the fundamentals are an issue of a deeply struggling economy will, at some point, carry the day and stocks will fall in line. (Pun intended) These highly out of balance setups between market prices and the underlying economics of it all, typically do not end well, particularly the longer they persist.
So truly, with the reality of the market and the economy being fully separate and at times highly uncorrelated, our view here at CRA is this.
"While the stock market is aiming high currently, the economy is sinking, fast, and slow."
If you have a concern that CRA might be overstating things about the economy, you have every right to say that. Lots of data you can look to create a buffer against our outlook. CRA believes in our outlook strongly but there is no posture that is dogmatic here at CRA. But, if you will recall, in August of 2019, we made the statement below at the tail end of our newsletter. In June of 2020, it was announced that we had been in recession since February of 2020 which was really before COVID 19 had really begun to have much impact on the economy. However, we were just as our outlook had surmised - in a recession. This was our statement-
While we are not very keen on putting out forecasts for markets, I do believe we will celebrate next July 4th in the midst of a recession here in the U.S. and quite possibly a global recession which will actually create the one here in the U.S.
-CRA Newsletter, August 2019.
AS OF LATE
The chart below shows the performance of the S&P index vs the Long-Term U.S Government Bonds for June. Bonds and stocks were virtually inverse of each other all month long and both basically gave positive returns very close to one another. Notice last month that though both stocks and bonds gave returns which were very close to one another, the volatility or greater movement of the bonds was noticeably less than it was with stocks.
Now, this chart below shows the performance of the S&P index vs the Long Term U.S Government Bonds for 2020 Year-To-Date. While stocks have rallied the last 100 days or so, bonds have definitely lead the way higher in price all year long and so they don't have any catching up to do. This has lowered interest rates so we do want their prices to stay strong and in July they certainly were strong.
For the S&P 500 index, it has finally gotten back to the breakeven point for the year and is now trying to tread water and keep its head above the waterline. It may well have trouble doing that as time marches forward.
The chart below shows the Long Term Government Bond prices versus the S&P 500 index for the year 2020. Basically, these bonds have returned about 25% more to the investor than has the S&P 500 and this has occurred with much lower volatility in the bonds than the S&P has had.
One benefit of lower interest rates- is lower mortgage rates and so you may be thinking, it may be time to refinance. In July, 30-year mortgage interest rates fell to their lowest rate EVER. They dropped below 3.0% for the first time! Stay tuned, there is more increase in the price of bonds to come so we see lower mortgage rates are ahead.
What is working well in stocks?
Even in a struggling economy, there are certain areas of stocks that do seem to be outperforming quite well. When discussing "outperforming", we mean this in a relative sense to the performance of the S&P 500.
Overall, as we look for broad blocks of stocks or indexes which might be outperforming the S&P 500, there is one standout for sure. The NASDAQ 100. It has been a leader for an extended period. While our models had us strongly allocated to this for quite some time, in the second half of July we got a model indication to begin to curtail some of the risks in the portfolios allocated to stocks and so we reduced our exposure to the NASDAQ 100 by 50%.
Beyond the NASDAQ 100, we do see some slices of markets that have been showing some real shine in terms of their performance. There have been strong performances being given by technology stocks as well as precious metals stocks. You can see the graphs of both of these, along with the NASDAQ 100 in the chart below.
The chart below highlights the May - July performances of four noted market segments. There are notable differences in performance and volatility of each.
WHICH IS BETTER?
When we look at stocks, some of the worst-performing stocks in the 1st quarter of 2020 were also some of the best performers in the 2nd quarter and this strong performance clearly bled into July's skyrocketing performance. The current struggle with stocks is they were overall such poor performers in the 1st quarter, they had to rise about 50% to just get back to break even (which they have just finally accomplished - (see our second chart above). On the other side of the equation, those high-quality government bonds did so extremely well in the 1st quarter, remainded flat in the second quarter and they too continued their siege higher in July. (I taught a class one time called, "Bonds Rule-Stocks Drool"). Therefore the fact that they were flat in the 2nd quarter has not really hurt their outperformance year to date. U.S. Goverment long term bonds still show a 25% outperformance over the S&P 500 for 2020.
Please let us know if you would prefer an online appointment with us rather than face-to-face. We have been doing them for years and can do any reviews or meetings online if you would like us to.
We remain watchful.
Ken Graves, Chief Investment Officer
Capital Research Advisors, LLC
Capital Research Advisors, LLC,
4185 B Silver Peak Parkway,
Suwanee, GA 30024
800 -767- 5364
All rights reserved
Mortgages - We said the rates would start declining. They declined some, leveled off for a bit here and they are now falling again. In July the 30 year mortgage rate fell below 3.00% for the first time ever.
Watch rates, please!
"While CRA has nothing to do with nor are we in the mortgage business, I am amazed at these falling rates. As you can see above, mortgage rates continue our predicted fall as we head into the fall.
But wait, there's more! Yes, though rates have fallen, the CRA outlook is for them to be lower in six months than they are today.
The economics of it all
In the main body of this newsletter, the view of the economy from our vantage point has been clearly laid out. It is definitely struggling and we believe it will continue to do so in a big way.
I do want to review a couple of conversations I have had recently about the business environment. One gives us a great outlook on the stability of business and another points to a great struggle.
One client owns his own company and annual sales are in the $10+ million per year range. In talking about business for the company and how it was progressing he gave some varying inputs. First, he said, it is hard to get face to face meetings right now with potential new clients. No one wants to meet and everyone for the most part seems to be sitting tight with their existing product lines.
I expressed some concern for his company in this semi lockdown mode that appears to be occurring and potentially limiting growth for them right now. Then he tells me there is a lot of good things about the set up right now. Mainly, since new customers are not keen on meeting with him, his existing customers are also not willing to meet with his competitors and this is keeping his existing business very very stable. He then goes on to point out that it is also saving him a lot of money. No one who works for him is traveling so his business travel expenses are basically at $0 for the last 6 months which leaves him with more profits at the end of each month.
Also, his existing customers, interested in adding new lines of products to their offerings, are almost begging him to expand his manufactured offerings to them so they don't have to go outside of existing supply channels to find those new products they desire. Their basic message here is this, "Sell us more stuff!" He is working hard to accommodate those requests!
The next conversation I will relay is with a sixty-year-old captain from a major U.S. based airline. He has some pretty senior status based on total time with the airline and the massive amount of total hours of flying time he has acquired.
First, he has not flown an airplane in six months so he currently is not legal to fly any aircraft at all. Next, he is greatly concerned about whether he will ever sit in the cockpit again before he is either offered early retirement or possibly forced to retire early. Quite the dilemma.
Airlines are stuck in a tough spot right now. Their most well trained and highly experienced people are also their most highly paid. Training and experience both are worth a lot, especially in critical situations. So airlines are burning through cash every minute they stay in business. They want to cut the cash burn by jettisoning highly compensated employees but then all that experience walks out the door. It is a tough spot to be in!
Back to my 1 on 1 with the pilot. He hasn't flown in a while, not legal in any cockpit, and wonders if he ever will be again. For the aircraft, he is currently "typed" in, of all the aircraft of that type with the airline he is employed by, three out of every four of them is currently grounded, idled by the lack of passengers flying due to COVID. They sit so he sits.
His view is that there has never been a time in aviation history where any commercial aircraft has ever been cleaner and more sterile than his company's planes sitting at the gate ready to receive passengers. The problem or concern is not with the airline and their protocols for clean aircraft, the concerns are really focused on all the people who will board that super clean aircraft and their willingness to "straighten up and fly right" during the flight. Staying compliant with mandates as well as what many will view as common sense actions while onboard.
So this pilot is nervous after a great multi-decade career that he might have already flown his last flight and his career, rather than going out with a great bang, has already come to an abrupt end.
+19.9% < -9.9%?
If you read the current headlines on housing in the U.S., there is a great deal of applause and fanfare floating around. Some of it is justified. In late July the June existing home sales numbers came out and June sales of existing home rocketed higher by 19.9%! A wonderful number in a struggling economy. The other side of that coin is this, June of 2020 versus June of 2019, existing-home sales fell -9.9%. There is no attempt to pour water on the home sales fire here but just trying to create a balanced perspective with a broader look.
TIME FOR A CRUISE?
Has anyone thought about a cruise ship lately? I would bet most people have not thought about cruising or cruise ships for the last 6 months or so. Well, now might be the best time EVER to think about cruise ships! Now I am not talking about actually getting on a cruise ship but I am talking about BUYING a cruise ship! Right now, with no one thinking about getting on a cruise ship, "slightly used, never been raced" cruise ships are ON SALE. That's right, cruise lines are trying to stay alive/in business and so they are trying to sell their cruise ships! Look at this "USED CRUISE SHIP" floating lot below! Take your pick and sail away!
(Tax, title fee, license, prep fees, extended warranty, maintenance fees, and records are all extra. Offer not valid in all lakes, credit quality may affect your payment.)
A growing problem...