Last Week’s Markets in Review: Cash is Piling Up
April retail sales came in well above expectations, shocking economists and market pundits by registering a month-over-month increase of nearly 18%. All welcomed an upside surprise in retail sales as a potential sign that the current economic recovery is concretely underway, remembering that consumption makes up approximately 70% of annual U.S. GDP, and equity markets reacted accordingly. In the U.S., the S&P 500 Index rallied to a level of 3,098, representing a gain of 1.88%, while the Russell Midcap Index pushed 1.85% higher last week. Meanwhile, the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned 2.25% over the week. Moreover, developed and emerging international markets returned 2.06% and 1.55%, respectively. Finally, the yield on the 10-year U.S. Treasury fell minimally, finishing the week at 0.70%.
As investors, we all have to wear many hats, whether it be the economist, the analyst, or the trader hat. For instance, the economist may take a longer-term perspective that relies on interpreting macroeconomic trends that potentially develop over a lifetime. In contrast, the analyst may put more of a focus on quarterly bottom-up stock-specific research, while the trader may only be concerned with evaluating very short-term pricing dynamics. Regardless of the differences in approach, all are similar in that they rely on data and disclosure when calibrating their respective proverbial crystal ball.
Calibrating this crystal ball has become increasingly difficult in light of COVID-19, as forecasted expectations tied to the release of economic and stock market data have become increasingly unreliable due to the truly unprecedented nature of the world we all operating within today. Consider Tuesday’s retail sales numbers, which increased in May by 17.7% versus expectations for an 8.5% increase, or Thursday’s Philly Fed Manufacturing Index June reading of 27.5 versus expectations for -20. The same rings true for the number of S&P 500 companies issuing quarterly guidance. As you can see in the chart below, company-issued forward guidance is substantially lower at 20% than the average of about 50% in years past, and that’s making it more difficult for analysts to formulate price targets reliably.
Source: JPM Asset Management
The high degree of uncertainty clearly evident amongst so-called experts has had a resounding impact on investor psychology as equity funds broadly saw the largest outflows in history throughout May. The bulk of these outflows presumably made their way to cash, with investors currently holding the highest amount of cash on record, $4.6 trillion! So, when will this record amount of cash sitting on the sidelines begin to make it’s way back into equity markets? With gross domestic product (GDP) and earnings-per-share (EPS) figures expected to bottom out in the 2nd quarter, it will be interesting to see if the fear of missing out (a.k.a. “FOMO”) sets in and investors re-enter the market before quarter-end, or if, on the other hand, they continue to hold high levels of cash until further clarity can be had once 2nd quarter data is released.
In our view, diversification is a strategic decision, not a tactical one. In other words, true portfolio diversification is maintained by having strategic allocations to various asset classes, sectors, and regions. However, sufficient portfolio diversification cannot be tactically applied at the first sign of trouble, because by that point, it’s often too late. For this reason, we encourage investors to stay disciplined and work with experienced financial professionals to help manage their portfolios through various market cycles within an appropriately diversified framework that is consistent with their objectives, time-frame, and tolerance for risk.
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Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 6/19/20.
Rates and Economic Calendar Data from Bloomberg as of 6/19/20. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index, U.S. Large Cap defined by the S&P 500. Sector performance is measured using GICS methodology.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.
The prices of small company and mid cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 05/24/19. Rates and Economic Calendar Data from Bloomberg as of 05/24/19. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.