STA Weekly Report – Market Update: COVID and Corrections
Written by Luke Patterson | Friday, September 4th, 2020
INSIDE THIS EDITION: Market Update: COVID and Corrections Weekly Global Asset Class Performance The Hits Keep Coming to the Energy Sector as Exxon Gets Booted from the Dow: How This May Impact Your Portfolio and Financial Plan Coronavirus / COVID-19 Resource Center
For this week’s report, we are going to focus on COVID and corrections. This is especially timely as markets spend Thursday and Friday in retreat. Although it is never a great feeling to see stocks pull back, we would argue that this two-day correction looks to be a healthy development, especially considering the strong rally we have seen since the end of March.
Before we discuss some of the key observations in markets we have seen this week, we thought a COVID-19 would be helpful as it feels in some respects that the news media has begun to lighten its focus on the pandemic, at least at the margin.
Market observation #1: COVID-19 worries should be abating, and the economy should continue to slowly recover
We continue watching COVID-19 and as we do so are seeing that September is painting a very different picture than what we had back in June and July. Take for example the daily reported new positive COVID-19 tests compared to the Daily reported deaths from COVID-19 in the US. June and July saw a dramatic spike in the number of new positive COVID-19 tests but since then we have seen a steadily declining infection rate in the US. Similarly, the death rate has been in gradual decline since June and July albeit the decline has been less impressive.
We may attribute this less rapid decline in the daily deaths to the drastically different outcomes we are seeing amongst age cohorts. As the chart below clearly shows, the virus disproportionately leads to death in the 65+ population. At the same time, those below age 65, especially below age 55 have dramatically lower risk of death from COVID-19.
As we see it, we think these trends are likely to hold until we get a widely distributed vaccine that people are willing to take against COVID-19. On this front, we have certainly seen some progress with 3 vaccines already approved for early or limited use. However, it is our sense that large percentages of the population are unwilling to take these limited use vaccines. What this means is that until a fully approved vaccine is widely accepted by the general population that COVID-19 is likely to remain with us.
From an economic perspective, however, we do not think it matters that much. Even in a scenario where a vaccine is not developed or widely received by the general population, the economic data still shows that parts of the economy are improving despite this. Take for example normal day to day activities like eating out at restaurants. While year over year this data point has seen a decline of nearly 40%, we continue to see weekly improvements in the number of reservations being made via the online reservation system Open Table. We think this is encouraging for a return to normalcy as eating out is arguably a very large part of a normalized day-to-day US economy.
Market observation #2: End of week sell-off in FAAGM stocks could be the beginning of a meaningful pull back.
As most seasoned investors know, the most dangerous words in investing are “it is different this time”. Thursday, we saw a nearly 5% decline in the Nasdaq composite and 3.51% decline in the S&P 500. By midday, on Friday the Nasdaq was down another 2% and the S&P 500 was down another 1.5%. While many of the stocks in each index declined and contributed to the carnage, we note that in a bit of a change from other declines earlier this year, that FAANGM (Facebook, Apple, Amazon, Netflix, Google, and Microsoft) were among the largest detractors. This tells us that investors may be waking up to the risk that maybe at some point valuations will matter and perhaps there is a concern that the unabated climb higher may require a bit of a breather. This is especially true as we compare the current FAANGM rally to other manias of past decades. Each of those prior episodes of strong price action was eventually met with selling as valuations corrected. We don’t think it is likely that this turns into a dot come type decline as there is still plenty of liquidity in markets, we do think investors should pay attention to the opportunities that may arise in a pullback. If in fact prices of technology companies with wide moats decline, investors may want to consider incrementally deploying capital gradually into the sector. Doing so gradually will help investors make sure that they add lower-priced shares but also still leave room to add more should the decline continue a bit longer.
Market observation #3: Insiders are selling stock into the rally
As we have said before, the economy and the stock market are two different things. In the latter, what we have noticed is that company insiders have increasingly sold the rally off the March lows. In fact, in the month of August, US executives sold $6.7B of their company stock. This is the most insider selling that we have seen in the last five years. Not since November 2015 have we seen insiders sell as much stock in a given month. More interesting however is that not only has the dollar amount of stock sold been the highest since 2015, but we are also seeing the largest number of executives, 1,042, selling their company stock since August 2018.
What we think this trend over the last month may signal is company insiders beginning to feel as though the market may be running ahead of itself. Historically, this has also been a good barometer of upcoming downside volatility. Take for instance early 2014 which also saw a ratio of insider selling to insider buying of 8 to 1. Shortly thereafter, the S&P 500 saw a 6% correction. In 2007, we had a ratio of insider selling to insider buying of 11 to 1 and shortly thereafter we saw the S&P 500 decline nearly 5%. While this data is by no means a guarantee of foretelling the direction of markets, it may have been an early indication of the correction we saw on Thursday and Friday of this week.
Market observation #4: US IPO activity has been on the increase while European IPO activity has been lower than 2019
In another sign that domestic markets are potentially running slightly ahead of themselves, the IPO market, at least in the United States remains more active this year than it was last year. This is certainly different than what we are seeing in Europe, a geography that has experienced a decline in new IPO activity compared to 2019. What we think is that this highlights a hot domestic stock market that private companies are looking to take advantage of when they hit public markets with new issuances. We also think this may signal geographies which investors should be looking at for opportunity. Namely, Europe’s quiet IPO market may indicate value while the US healthy IPO market may signal more fully valued markets.
Weekly Global Asset Class Performance
The Hits Keep Coming to the Energy Sector as Exxon Gets Booted from the Dow: How This May Impact Your Portfolio and Financial Plan
Written by: Kevin Lenox, CFA®, CFP® and Scott Bishop, MBA, CPA/PFS, and CFP® Thursday, August 27th, 2020
Although the stock market has started to rally, many sectors have yet to rebound. That is very true in the oil and gas industry. Many of our Texas clients are reliant on the oil and gas sector for both their work and retirement benefits. With that in mind, we will take a look at oil and gas stocks in terms of the impact on your portfolio and the ancillary impacts on your planning – especially for those working in this sector. Please check out a special edition of the STA Money Hour where Kevin and Scott take a deeper dive into both the article and planning issues.
Over the last several weeks, the team at STA Wealth has attempted to keep our clients apprised of updates related to the markets, economy, government, tax, retirement, and other changes impacting us during this difficult time. As the Coronavirus (COVID-19) pandemic continues to spread, its impact on businesses and individuals has been significant. Stay up-to-date on the latest news with this Coronavirus Resource Center as your go-to resource for commentary, news, and other resources. Bookmark this article to check back regularly for updates.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by STA Wealth Management, LLC), or any non-investment related content, referred to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from STA Wealth Management, LLC. Please remember to contact STA Wealth Management, LLC, in writing, if there are any changes in your personal/financial situation or investment objectives to review/evaluating/revising our previous recommendations and/or services. STA Wealth Management, LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the STA Wealth Management, LLC’s current written disclosure statement discussing our advisory services and fees continues to remain available upon request.
Financial Planning and Investment Advice offered through STA Wealth Management (STA), a registered investment advisor. STA does not provide tax or legal advice and the information presented here is not specific to any individual’s circumstances. To the extent that this material concerns tax matters or legal issues, it is not intended or written to be used, and cannot be used, by a taxpayer to avoid penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
Thank you for your interest in STA Wealth Management!
Whether you are looking for someone to partner with you in protecting and growing your assets, or you are an experienced financial advisor interested in joining the STA team, we want to hear from you. Please call us or email us, and we’ll be in touch as soon as possible!
800 Town & Country Boulevard, Suite 410
Houston, TX 77024