Don't Let The Major Averages Fool You

The S&P 500 year to date is up around 9% for the year.  The Nasdaq composite is up nearly 30%.  These look like stunning returns for stocks when taken at their face value. However, don't let the major averages fool you.  The economy as well as the stock market was derailed in February by the virus.  Since then stock market leadership has been narrow and largely confined to technology, certain sectors of health care and some specialty sectors such as eCommerce.  Most other sectors and investment styles have struggled.  Anything tied to consumer discretionary spending for example has been a disaster.  There is a sizeable percentage of the S&P 500 companies still trading well below their  2019 closing price.  Here's why this doesn't necessarily show up when you just look at the financial headlines.  Major market indices like the S&P 500 are weighted by their market capitalization {market cap}.  Apple for example currently comprises about 6% of the S&P 500’s market cap.  At the end of September, the top ten companies in the S&P 500 comprised nearly 30% of the index’s market cap.  The top five companies, {Apple, Microsoft, Amazon, Alphabet and Facebook} were 22% of that index’s market cap.  As such, these have helped propel these indices higher but have also masked much of the rest of the market’s hard times.    An equal weighted S&P index such as the Invesco Equal Weighted S&P 500 {RSP} is a better indication of this as is the better-known Dow Jones Industrial Average.  These are basically break even for 2020. 

While many of these stocks that have growth but are in the wrong parts of the market right now or value oriented names have struggled this year, I'll point out that many have continued to pay their dividends which overflows into the Exchange Traded Funds {ETF}  space.  It is also highly probable that many of these securities as well as the ETFs that hold them  are significantly undervalued right now and have the potential to come back when the economy recovers, again likely next year.  Most of these struggling sectors and companies in 2020 have done so because of the disease, and not because there is necessarily something fundamentally wrong with what they do. 

There has been a consistent bid under the markets these past few months.  All pullbacks have been met by buyers.  I believe this is because investors are looking through the elections and are starting to sense that perhaps this winter won’t be as bad as many fear.  The possibility of a vaccine, better therapeutics, better preventatives {social distancing, masks etc.} and adaptation will likely lead to some mitigation I’m guessing by late winter or early spring.  In addition, the Federal Reserve has signaled that it will remain accommodative towards the economy for an extended period of time and at some point there is going to be a massive stimulus package.  

Further stimulus is being signaled regardless of who is President.  If President Trump wins then we’ll see more haggling after the election.  If Mr. Biden wins then the only issue will be the size of the deal.  Absent an unlooked-for event or Covid mutating in some manner that changes the trajectory of the disease then I believe all the issues I’ve mentioned above should potentially lead to an economic recovery starting in 2021.  Evidence of that is all around us but should be more readily apparent by springtime.  Retail sales which came in much stronger than expected this morning for September further supports my case.  

I believe Mr. Biden will win in November.  This is not a political statement; it’s me simply counting votes.  I have been saying this for months, but investors seem to finally be coming around to this view in recent weeks.  However, I don’t think it matters from the market’s perspective at this point whether President Trump or Mr. Biden wins for stocks to potentially do well in 2021. 

I invest money for clients through investment strategies that utilize ETFs. I believe you own ETFs for three purposes in terms of their growth potential.  These are capital appreciation, dividends and expected future dividend increases.  2020 has put some of this potential on hold but assuming the virus becomes a manageable event then it is highly probable these growth characteristics could resume next year.  

I will be traveling at the end of next week so expect only light posting over the next 10 days or so.

*Long indices related to the Nasdaq Composite and the S&P 500 in client and personal accounts.  Long RSP in client and personal accounts.