14 min read
Market Outlook: September 2020
August 28, 2020
6 min read
V for Victory? Or for Vulnerability?
While share prices have achieved that most optimistic of predictions – the V-shaped recovery – it’s hard to square that with other leading economic indicators. Sure, the Purchasing Managers Index suggests that manufacturing is expanding at a pre-pandemic rate, but nowhere near as rapidly as it was just a couple of years ago. Building permits are being issued again at a hope-inspiring rate, and yet nowhere near as high as before the Great Recession nor anywhere near the point where supply meets demand. Homebuilders are having a hard time pushing through month-over-month price increases. While there is much reason for optimism in these readings, only the stock market has returned to its previous record-setting pace.
In fact, only one widely recognized leading indicator corroborates Wall Street’s story: retail sales. Its jagged movement down and up between March and July is sharp enough to shave with. What’s getting bought and from where has changed; still, people bought more than $483 billion worth of retail goods in July. Once more the consumer has rescued the American economy.
But who’s going to rescue the consumer?
- The stock market has returned to record territory, largely on the strength of retail sales.
- This has led to a surge in the Consumer Discretionary sector but, considering economic conditions, it’s unclear how much longer this can go on.
- The Information Technology and Communication Services sectors also present opportunities.
First look at September
Only three sectors are hotter than the overall S&P 500. Consumer Discretionary is among them of course, led by the Internet & Direct Marketing Retail industry. If you’re looking for a well-known mega-cap to place a bet on, you might be happy with the ADR of Alibaba (BABA: $283.16), but another Chinese company surging now is JD.com (JD: $78.86). One domestic play to consider would be eBay (EBAY: $56.61) which, unlike other e-commerce giants, still seems to have some running room. Specialty Retail is also gaining momentum, with home improvement play Lowe’s (LOW: $166.97) setting the pace.
Within the Information Technology sector, the Technology Hardware, Storage & Peripherals takes point. Switzerland-based peripheral maker Logitech International (LOGI: $72.83) is considered a strong bet among the midcaps and, if you’re willing to take a flyer on a microcap, one company to look at is editing deck maker Avid Technology (AVID: $7.98).
Communication Services has also been spurred on by the New Normal, particularly in Interactive Media & Services where crowdsourced review firm ANGI Homeservices (ANGI: $13.70) is coming on strong. It’s hard to ignore the sector’s Entertainment industry, where game publisher Activision Blizzard (ATVI: $83.60) continues to gain.
While all this is welcome news, though, it’s hard to imagine how all these home and home-office businesses keep growing while the economy contracts and unemployment rolls keep growing.
How we did in August
Last month in this space, we named a dozen companies we thought would be good bets for the coming month. Here’s our scorecard:
|Church & Dwight||CHD||-0.20%|
|Super Micro Computer||SMCI||-13.82%|
Nothing to brag about here, but not horrible for a first outing. Let’s see if we do better next time.
Gross domestic product decreased at an annual rate of 31.7% in the second quarter, according to the Bureau of Economic Analysis. This revised number is not as bad as the initial 32.9% — though plenty bad – due to revisions in private inventory investment and personal consumption expenditures.
For the week ended August 22, seasonally adjusted initial unemployment claims hit 1,006,000. If there’s good news to be found in another million unemployed Americans, it’s that the figure is 98,000 lower than the previous week’s. The 4-week moving average was 1,068,000, a decrease of 107,250 from the previous week’s revised average.
The unemployment rate was 9.9% for the week ending August 15, a decrease of 0.2 percentage points from the previous week’s revised rate. In real numbers, that means that, despite a reduction of 223,000 from the ranks of the unemployed, there are still 14.5 million out-of-work in this country.
For the 30 days ending August 27, the S&P 500 kept its foot on the gas, adding 8.55% on a total return basis in August. Meanwhile, the CBOE VIX market volatility index closed the month at 24.47 dipped 5.3%.
Over the course of July, the yield on the benchmark 10-year U.S. Treasury note, which stood at 0.533% at the end of July, rose to 0.752% as of Thursday’s close.
Oil prices rose around $2 in the 30 days ending August 27, as West Texas Intermediate crude continued its crawl back from the abyss. Meantime, gold reversed direction and dipped $9, closing at $1,936 per ounce.
In a replay of July’s results, the euro and British pound improvement continued to rise sharply against the U.S. dollar, while the Japanese yen fell slightly. The cryptocurrency was more subdued Bitcoin gaining around $325, closing Thursday at $11,268 after having pierced the $12,000 mark earlier in the month.
The Federal Reserve announced a tolerance for higher inflation in order to reduce unemployment. This policy shift suggests that interest rates will remain low until every last bartender and spin class instructor is back to work.
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