After an encouraging start to the week, U.S. stocks fell, ending the week down slightly. The week was characterized by the push and pull of two market forces that have been accentuated by the COVID-19 crisis: Growth and Value.
It has been a historically challenging stretch for Value stocks (not to mention Value investors) for the better part of the last decade. Value is a well-researched investment factor that has typically provided excess returns over Growth. Yet this past decade has challenged that premise, and COVID-19 has not helped. What is unique about the current crisis is that the boundary between winners and losers is drawn very close to the line between Value and Growth. Expensive, high growth stocks, like Amazon and other providers of online retail and cloud services, have benefited from an enormous and almost overnight shift in consumer patterns related to online shopping and remote working, which are likely to prove somewhat sticky. Value stocks, which tend to be more traditional retailers and manufacturing, have seen their businesses come to a halt, and their fortunes are tied tightly to pandemic recovery.
The tug-of-war between Value and Growth appeared to intensify this week. Growth outperformed Value by about 3% on Monday, only to underperform by almost 4% the rest of the week. These are significant swings! The fact that Value is increasingly becoming competitive in this battle is good news, suggesting investors are beginning to price in a post-vaccine recovery.
We believe in science, not speculation, and thus view Value as an important driver of outperformance over time. However, there are other demonstrated, persistent factors like Quality, Momentum, and Size, which we see as important components of a well-diversified portfolio.
Headlines This Week
- The initial jobless claims saw its first increase in 16 weeks.
- Many companies, especially in the travel industry, are changing furloughs to permanent layoffs.
- In the airline industry, many pilots volunteered to take early retirement.
- The U.S.-China tensions escalated after Secretary of State, Mike Pompeo, called for the people of China to change the Communist Party.
- Also, the U.S. ordered the closure of China’s Houston consulate, citing the need to protect American intellectual property.
- In response, China closed the U.S. consulate in Chengdu, which is located in the region of Sichuan.
Brexit and the E.U.
- In the U.K., the Brexit trade deal with the E.U. looks increasingly likely to fall through before the end of the year, which would result in trade terms reverting to WTO rules.
- The U.K. might also abandon its plan to get a deal with the U.S. before the presidential election. The hope was that this would be a first win in the post Brexit era for Britain, but talks have stalled, and time is running out.
- On the stimulus front, the E.U. managed to reach an agreement on a €750 Billion Euro recovery fund.
- About 26% of companies within the S&P 500 index have reported second-quarter earnings results.
- Thus far, over 70% have reported results better than estimates.
- During the previous quarter, 185 companies withdrew their EPS guidance for the rest of the year. We are seeing a similar trend this quarter as well, as companies state that it is too difficult to predict the future.
The Week Ahead
The $600 weekly unemployment benefits are in flux.
- The benefits are set to expire at the end of July, while debate continues on the terms of the next stimulus bill.
- With the Senate version of the stimulus bill not finished, a deal is not expected until sometime in August, leaving the unemployment benefit at risk. However, there is talk of a short-term extension of the current program.
- The Senate is looking to scale back the benefit while the House passed a bill to keep the current weekly benefit at $600.
- Given the reversal many states are seeing in their reopening plans, this piece of the bill has taken on increasing importance.
The GDP figures for Q2 are set to be released on Thursday.
- Q2 data is likely to give a more complete picture of the impact of the pandemic since shutdown efforts began towards the end of Q1.
- Experts are predicting an annualized rate of contraction of 32.6%, which would be the largest quarterly contraction on record.
The Federal Reserve’s latest interest rate decision.
- Consensus does not foresee any significant changes to the Fed’s policy at this point.
- Due to the next stimulus package working its way through Congress, The Fed is likely to hold off until they have an understanding of the government’s next steps.
Playing Ball Again!
- For those of us who have been missing live sports, this weekend will offer a full schedule of Major League Baseball games to compete with coverage of the 3M Open golf tournament, on top of the Premier League soccer games on Sunday.
- The National Basketball Association will start their season on Thursday as the Utah Jazz take on the New Orleans Pelicans, and later that evening, the Los Angeles Lakers take on the Clippers.
Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets of over $1.7 billion.Overview
Strategic Financial Services, Inc. is a SEC-registered investment advisor. The term “registered” does not imply a certain level of skill or training. “Registered” means the company has filed the necessary documentation to maintain registration as an investment advisor with the Securities and Exchange Commission.
The information contained on this site is for informational purposes and should not be considered investment advice or a recommendation of any particular security, strategy or investment product. Every client situation is different. Strategic manages customized portfolios that seek to properly reflect the particular risk and return objectives of each individual client. The discussion of any investments is for illustrative purposes only and there is no assurance that the adviser will make any investments with the same or similar characteristics as any investments presented. The investments identified and described do not represent all of the investments purchased or sold for client accounts. Any representative investments discussed were selected based on a number of factors including recent company news or earnings release. The reader should not assume that an investment identified was or will be profitable. All investments contain risk and may lose value. There is no assurance that any investments identified will remain in client accounts at the time you receive this document.
Some of the material presented is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. Strategic Financial Services believes that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.
No content on this website is intended to provide tax or legal advice. You are advised to seek advice on these matters from separately retained professionals.
All index returns, unless otherwise noted, are presented as price returns and have been obtained from Bloomberg. Indices are unmanaged and cannot be purchased directly by investors.