Historically, August is the 2nd worst month for the stock market. Yet again 2020 proved to be an unprecedented year. We just had the best August for stocks since 1984. Having said that, I am still concerned about the lack of breadth in the market. While the S&P 500 Index has made a new all-time high, only 13% of S&P stocks are making all-time highs, while 50% of the stocks have made no gains in 2 years (source: CNBC/Carter Worth). Even worse, some 29% of S&P stocks are actually down 20% YTD (source: BTN Research).
An additional worry is that the stock market seems completely detached from the economy. While we did see a significant economic rebound in June, with most states re-opening, the pace of the rebound in July and August slowed. This is can be seen in employment as weekly new unemployment claims rose back above 1 million and we still have some 15 million people still out of work. Potentially more impactful is that an estimated 33% of the pandemic-driven layoffs in the United States that occurred from March through May will be permanent, i.e., the workers will never return to their old jobs at their former employers (source: Brookings Papers on Economic Activity, BTN Research). That 33% equates to roughly 9 million jobs.
The Conference Board Leading Economic Index® (LEI) for the U.S. Increased in July Despite improvement, pace of economic growth will likely weaken in final months of 2020 “The US LEI increased for the third consecutive month in July, albeit at a slower pace than the sharp increases in the previous two months,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “Despite the recent gains in the LEI, which remain fairly broad-based, the initial post-pandemic recovery appears to be losing steam. The LEI suggests that the pace of economic growth will weaken substantially during the final months of 2020.”
Much of the government support provided earlier this year expired at the end of July and Congress has returned to their partisan bickering. While I do expect them to get to an agreement, the longer they delay the more long lasting the negative effect on the economy.
So what’s ahead for us in September. Well, we are getting into the heart of election season, which means increased volatility. The economic recovery is slowing down and the economy is still well below its pre-Covid level. September is traditionally a poor month for stocks. However, 2020 has proven to be about as unpredictable as any year in history. We also have the Federal Reserve which is committed to doing what it takes to support the economy. As show in the chart below, September tends to be a weak month. In fact, it is the weakest month on average since 1950. Additionally, the last two times August was up more than 5% were 1986 and 2000; the S&P 500 fell 8.5% and 5.4% in September those years.
Our approach is to remain invested but take some profits in some of the big winners, offsetting some of the declines from earlier this year. We are keeping equity allocations in line with your overall risk tolerance but we are making some shifts between industries/sectors.
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September Calendar of Events (comments and additions for future months are always welcome)
- September is National Suicide Prevention month – let’s look out for friends and loved ones having a hard time in 2020
Sep 7th Labor Day
Sept 11th Patriot Day- honoring those who lost their lives on 9/11/01
Sept 18th Rosh Hashana begins – wishing all our family, friends, and colleagues of the Jewish faith Shanah tovah um’tukah
Sept 22nd Autumn begins – let’s pray it doesn’t include a bad flu season
Sept 27th Yom Kippur- Chag Sameach
Sources: LPL Research, Bloomberg, CNBC
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