Market Overview – Fiveish Months into Covid-19

It seems like it was just yesterday that the world was hit by such a disaster rivaling the 2008 crisis economically and has fundamentally changed the way we live. I still haven’t really gotten fully used to it - often forgetting my mask and having to make the walk of shame to my car to retrieve my mask. Nevertheless, the S&P 500 has exploded, reaching record highs. So, has the economy really recovered?

In short no. Although the S&P 500 has nearly recovered, the economy cannot be summed up by top 500 companies in the US. If we dive deeper into that number, we can see that only 83 companies are +20% this year, whereas 133 companies are still -20% or more (as of August 13, 2020).

This makes sense logically since the largest companies have resources (money, man power, technology, supply chain power, etc.) to weather most disasters like Covid-19 while the mid and small sized companies struggle to adapt to the new social-distance world. Not to mention the huge government bailouts and monetary policies injecting money into the markets favoring large companies which capitalized on the government’s sloppy job to respond to the crisis (recall the PPP fiasco). This has been my driving investment thesis, where my portfolio leans heavily on large cap technology stocks (which has done spectacularly in the past couple months!).

A Changing Economy

Another shift with the S&P 500 is the weighting of information technology, healthcare, and consumer discretionary, which now accounts for 53% of the index (+4.6% from February). This has come at the expense of financials, energy and industrials.

We’ve seen companies step up to fill the void through video conferencing, contact tracing apps, temperature readers, and robotic cleaners. Covid has only sped up technology-based trends such as digital transactions, tele-healthcare and sustainability. I believe we can expect this to continue in the foreseeable future even as a vaccine is released. Companies are realizing that virtual and automated services are not only possible, but can be very profitable. I can see many employees continue to work from home the majority of the time. Many friends of mine who work in Silicon valley have permanent work from home options!

Key Insights:

Fixed income is still struggling - At about 70 basis points, the 10-year Treasure is 90% lower than its 60-year average of 6%. On the right we can see that the inverted yield curve has nearly predicted all of the last 7 recessions. However, what is interesting is how quick the recovery has been so far! Maybe we could see the yield curve start to normalize soon but this is unlikely with so much uncertainty on the future.

Cash is still King - From January to mid-May, a record of almost $1.2 trillion flowed to money market funds! Since then, only $200 billion flowed out while $4.6 trillion still sits in money market funds. Unfortunately, with interest rates at all-time lows, this cash isn’t earning anything after inflation is taken into account. It’s important to maintain liquidity in times of uncertainty, however knowing that your cash is losing out to inflation makes you think twice.

Inflation is creeping up but isn’t bad - Core CPI inflation (excluding food and energy) surged to 1.6% in July over the prior year. Sectors that led inflation higher were those hit hardest by lock downs which is consistent with reopening. Inflation is still below the Fed’s 2% target. This seems to be normal as cyclical growth is promoted and the economy recovers. 

I will continue to hold my overweight positions on blue chip and tech stocks for the time being. Never underestimate the power of the Fed and they seem to be apt to help fuel the economy’s recovery. Ultimately, it’s important to do your own due diligence and diversify your portfolio to achieve sustainable returns and hedge your risk. I would like to reiterate, my insight is just advice - you can take it or not.

I also want to hear from you! Let me know where you think the state of the economy is as we head into the 2020 election season?