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Strategic Insights

Volume 9, Edition 18 | May 18 - May 22, 2020

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A Small Sign

Doug_Walters Doug Walters | Articles

Read Time: 3:30 min


Small-cap outperformance could be another sign that the economy has bottomed, but uncertainty remains high, as the economic scars are deep.

Contributed by Doug Walters , Max Berkovich , ,

Large-cap U.S. stocks rose over 3% this week, while small-cap doubled that. During an economic recovery, one would expect to see smaller stocks outperforming, so investors are perhaps indicating an expectation of continued economic improvement. While it does appear to be the consensus view that we have already seen the worst of the economic data for this crisis, there is still much uncertainty about how lasting the scars will be to U.S. businesses and consumers.

A diversified portfolio is the best approach in an uncertain environment. We find exchange-traded funds (ETFs) an efficient way to express our investment philosophy and build in that critical diversification. Although ETFs have been around a long time, they are not as well understood by the investing community. While they differ from mutual funds in the way they are constructed and traded, at the core of both are individual securities like stocks and bonds.

If we look inside our current tactical growth factor model, what we find are nine stock ETFs, within which are hundreds of corporate stocks. If we dig into these ETFs, we find that the top U.S. stock holdings and their weight in our growth model are:

  • Apple Inc. (AAPL); 1.3%
  • Intel Corp. (INTC); 1.1%
  • Microsoft Corp. (MSFT); 1.1%
  • Walmart (WMT); 0.9%
  • Intuit Inc. (INTU); 0.8%


Headlines This Week

Keep on Printing 

  • The House passed a $3 trillion stimulus relief, called “The Heroes Act.” 
  • The bill provides for the second round of $1,200 dollar checks, along with hazard pay for essential workers, housing and food assistance, and money for the U.S. Postal Services. 
  • The Senate quickly raised concerns over the proposed bill, suggesting it will have to be revised before it can gain support. 
  • Majority Leader McConnell labeled the House bill “another big laundry list of pet priorities,” setting up another partisan battle. 

 Keep on Banking  

  • United Kingdom banks are lobbying against the prospect of negative rates. 
  • The banks believe this will further pressure the industry’s earnings and might not be an effective stimulus tool.  
  • Investors in Europe have already paid governments to lend money. Now, investors in other countries around the world are joining them. 
  • The one-year German Bund yields around -0.61%. That means investors will get around $99.39 after one year for every $100 invested!

20 for 20 

  • The U.S. Treasury issued a 20-year U.S. Treasury bond. The last time this occurred was in 1986. 
  • The new bond was auctioned off at a yield of 1.22%. 
  • The auction was deemed successful by market observers.  
  • With as much debt as the Treasury will issue to support stimulus efforts, they may regret an earlier decision to bypass a 50-year or 100-year bond.  

 Earnings Update 

  • Earnings season is near its end as over 95% of companies in the S&P 500 index have reported earnings.
  • In aggregate, S&P 500 earnings have declined around 14.6% compared to the same period last year.  
  • While a decline in first-quarter earnings is nothing to cheer about, the decline was widely expected. In fact, over half of the companies have exceeded estimates. 

The Week Ahead

The U.S.-China trade war may regain some spotlight next week as tension continues to boil

  • The U.S. has warned of consequences to a planned Chinese law that many say would limit the autonomy of Hong Kong.
  • The U.S. could remove special trade rules that Hong Kong currently enjoys if they feel China has too much influence over the region.

A number of significant reports are due next week which could influence how confident investor sentiment remains heading into the end of the month.

  • The Initial Jobless Claims report will be released on Thursday.
  • While still high, the number of new claims has been decreasing over the past few weeks.
  • Nondefense Capital Goods ex Aircraft (April) on Thursday will provide some insight into how manufacturers fared during the thick of lock-down measures.
  • Consumer Confidence, released on Tuesday, could fall lower due to the large number of unemployment claims filed since the last reading.
  • Revised figures for GDP Q1 are due to be released on Thursday as well, which could see the initial -4.8% move lower.

Financial markets will be closed on Monday in observance of Memorial Day.

  • The NYSE is set to welcome back some brokers on Tuesday after going electronic in response to the pandemic.

About Strategic

Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets of over $1.8 billion.