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Market Commentary for the week ending September 5th, 2020
- Technology stocks, and other market leaders in 2020, fell rather sharply during the market’s selloff late in the week.
- The S&P 500 broke a multi-week winning streak in spite of more good economic news.
- The U.S. economy added back 1.37 million of the jobs lost during the pandemic dropping the unemployment rate to 8.4%.
The Selloff's Unlikely Winners and Losers
The market selloff during the last two days of the week was one fueled by the year’s best performing stocks of 2020. The total loss for the S&P 500 for Thursday and Friday combined was -4.3% as some of the year’s best performing stocks such as Apple (AAPL), Amazon.com (AMZN), and Advanced Micro Devices (AMD) fell -7.9%, -6.7%, and -9.1% respectively.
As the below graph shows, the 50 best performing stocks in 2020, including the 3 above referenced stocks, fell on average by -6.1% during the Thursday and Friday selloff. This is very different than we have seen during most of 2020 when these leading technology stocks have tended to hold up the best when the market has fallen.
Equally interesting and unusual for 2020 is the performance of what have been the 50 worst performing stocks in 2020…actually rising on average on Thursday and Friday while the market fell sharply. Stocks such as Carnival Cruise (CCL), United Airlines (UAL), and Kohl’s (KSS) gained +10.9%, +3.6%, and +5.0% respectively. Could this be the start of a rotation in leadership? Only time will tell.
Zoom Video, the wildly popular video conferencing software, is selling for 124 times its 2022 estimated earnings! It’s even higher when considering the estimates for this year and next. This is called a P/E ratio, or Price / Earnings ratio. The higher the ratio, the more expensive the stock. High P/E ratios can be justified when companies are growing earnings rapidly, as Zoom is, but this high ratio of 124 already accounts for the next two years of growth. As a comparison, the median stock in the S&P 500 is selling for just 16.7 times 2023 earnings meaning that investors are valuing $1 of earnings from Zoom to be worth 7.4 times more than a $1 of earnings from the average company in the S&P 500.
This Week’s Performance Highlights
A week ago, everything rallied fueled by strong economic data followed by the most recent week when everything fell…well, nearly everything, in spite of more reports showing the economy is continuing to improve. The fact is that these economic reports have nearly no direct bearing on stock prices other than to create some short-term optimism or pessimism among investors which is ultimately the driving force of stock prices.
Large U.S. stocks were down -2.3% as measured by the S&P 500. Contrary to the trends so far in 2020 though the NASDAQ Composite had a steeper loss of -3.3% and the Dow Industrials held up better down just -1.8%. This was a week where we saw a more dramatic reversal in the performance of the market leaders.
- Small U.S. stocks suffered along with large stocks falling -2.8% for the week putting them back down -7.1% for the year. These stocks have yet to trade in positive territory year-to-date since the start of the pandemic.
- International stocks came under selling pressure as well with developed markets falling an average of -1.5%. There were meaningful differences though among the developed regions with Japanese stocks down only fractionally, -0.1%, while Eurozone stocks were down -1.6% and those in Australia lost -2.9%.
- Japan’s market, by some indication, is a better value than others around the world including when compared to U.S. markets. One sign of this is a $6 billion investment by Warren Buffett, the legendary value investor, in a handful of the largest companies in Japan.
- Emerging markets lost -2.7% impacted meaningfully by the largest, China, down -3.1%. Moving contrary to these declines was Brazil’s market up +1.0% but still among the worst performers year-to-date down -33.5%.
- Real estate stocks were flat on the week and still down -17.9% for the year. Gold gave back some of its recent gains down -1.5% while commodities suffered one of the bigger losses off -4.0%. In aggregate, these less traditional asset classed did help mitigate some of the losses in stocks.
- Bond prices inched higher by +0.2% adding to their gains for the year. The benchmark 10-Year U.S. Treasury yield closed nearly unchanged at 0.721%.
The employment picture in the U.S. continues to improve with 1.37 million jobs added in August, topping economists’ estimates, dropping the unemployment rate to 8.4%. This is great news and a huge improvement from the peak of 14.7% just a few months ago but the current unemployment rate remains more than double its level in February.
Initial jobless claims, a separated report on employment reported weekly using data from each state, showed another improvement with new claims coming in 881,000 for the week compared to just over 1 million the prior week. The number of continuing claims, or total number of unemployed receiving benefits, shows a bit of a mixed picture with a decline at the state level but an increase when including those receiving both state and federal benefits.
The manufacturing sector in the U.S. grew for the fourth consecutive month after a major contraction in March and April. The ISM Manufacturing Index came in at 56.0%, its highest level in 21 months and ahead of economists’ forecast fueled by growth in 15 of the 18 industries tracked. Any reading above 50% indicates growth for the most recent month compared to the previous but it does not indicate how the month compares to prior periods.
Upcoming Economic Reports
- Consumer Price Index
- Producer Price Index
- Initial and Continuing Jobless Claims