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Strategic Insights

Volume 9, Edition 26 | July 27 - July 31, 2020

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The Big Five

Doug_Walters Doug Walters | Articles

Read Time: 3:00 min

Stocks are increasingly being driven by “The Big Five,” Apple, Amazon, Microsoft, Facebook, and Alphabet. If you have benefited from their dominance of market cap-weighted indices, it may be a good time to consider factors.

Contributed by Doug Walters , Max Berkovich , Aleksey Marchenko ,

Stocks put in a positive performance this week, propelled by four of “The Big Five,” Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), Facebook (FB), and Alphabet (GOOGL). Particularly strong, thanks to good earnings results, were Apple (+14.7%), Amazon (+5.2%), and Facebook (+10.0%). The Big Five, now represent about 20% of the market cap of the S&P 500, which is an index of 500 of the largest companies in the U.S. As a result of their size, they are having an outsized influence on stock market returns. For example, U.S. stocks are up about 2% this year. Without these five stocks, the market would be down by about 4%.

While this pocket of performance has been great for holders of market cap-weighted indices, like the S&P 500, such concentration of risk swings both ways as weakness in even a few of these names could be a headwind for the returns of the S&P 500. In general, to reduce stock-specific risk, we favor funds that look beyond market cap for weighting. Advances in exchange-traded funds (ETFs) now enable us to own funds that target specific, proven, persistent factors like Quality, Value, Momentum, and Size. Does this strategy avoid The Big Five? No. Both Momentum and Quality factor funds, in particular, have sizable positions in these five stocks. The difference is they do not hold them just because they are big. Instead, they own them because they have attractive fundamental attributes. For example, if performance starts to stagnate, their weight in the Momentum funds will decrease.

If you have benefited from owning the Big Five in market cap-weighted indices, it is probably a good time to consider switching to a factor-based approach.

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Headlines This Week

Making Records 

  • It was no surprise that the U.S. economy suffered in a significant way during the shutdown in the second quarter.  
  • The 33% GDP decline in Q2 was the biggest slump the U.S. economy has seen in two centuries. With stocks remaining buoyant, many investors appear to be very optimistic that our economy will recover sooner rather than later. 

Jobs  

  • New unemployment claims in the week of July 25 came in at 1.43 million, with the total number of people on unemployment rising back above 17 million.
  • A slowdown in hiring has coincided with renewed caution, as some states pause or reverse reopening efforts.  

Fed  

  • The Fed Chairman, Jerome Powell, reiterated his plans to keep the overnight lending rates near zero. 
  • The Fed stated that they would do whatever it takes to bring the U.S. economy back to full employment.  

Earnings  

  • Over 63% of companies held in the S&P 500 have reported their earnings.  
  • Over 70% of the companies that reported have beaten their sales and earnings per share estimates. 
  • On the flip side, S&P 500 aggregate earnings declined by about 35.7% in the second quarter thus far. 

The Week Ahead

Going to Work

A fair number of employment reports are likely to be the focus next week.

  • Analysts expect Nonfarm payrolls to show an increase of 2.3 million for July.
  • An increase of 2.3 million would push the unemployment rate down to 10.3% from its previous level of 11.1%.
  • Given that the rise in new infections seen across the country started in the latter part of July, and many states recently began pausing their reopening plans, the initial and continuing jobless claims may provide more insight than the nonfarm payrolls this month.

Made in America

Manufacturing data could shed light on how well the sector has weathered lock-down measures and subsequent reopening initiatives.

  • The Manufacturing PMI (Purchasing Managers’ Index) figures for July, released on Monday, are expected to show a slight increase in expansionary territory.
  • The Non-manufacturing PMI for July comes out Wednesday.

Can’t Bank on it!

Bank of England and Reserve Bank of Australia are due for a rate decision next week.

  • There is chatter that England’s rates may go negative, but that’s very unlikely until later in the year.
  • Australia’s rates are 0.25% now, so a drop in rates is unlikely, but more stimulus may be in the cards, especially with a re-lockdown of Melbourne.

Beltway Buzz

Former Vice President Joe Biden has indicated he will announce his pick for a running mate in the first week of August.

  • Bettors continue to place Senator Kamala Harris at the top of the list.
  • Last-minute politics may not secure a stimulus bill this week, nor a last-minute extension of the $600 unemployment benefit, but hopefully, something gets pushed forward next week.

Earnings

The Walt Disney Co. (DIS) reports third-quarter fiscal 2020 results on Tuesday.

About Strategic

Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets over $1.3 billion.

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