August 2020 Market Commentary: The (US) Market Splits Its Pants

Data Source: Bloomberg

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August 2020 Highlights:

  • Global markets, as represented by MSCI All-Country World Index or ACWI, were up 6.1% in August led by Japan (catch-up performance after having lagged in July) and U.S. stocks (large growth technology).   S. stocks (S&P 500 +6.0%) continued their outperformance following better-than-expected 2Q earnings releases.
  • MSCI Europe returned 4.1% as the continent struggled with renewed coronavirus outbreaks and ongoing weakness outside of Germany. MSCI Japan returned 7.6% despite some month-end weakness following reports that Prime Minister Shinzo Abe would be stepping down due to health reasons.
  • Emerging markets underperformed developed markets, as the rally in Chinese shares back in July lost even more steam. MSCI Emerging Markets returned 2.2% and MSCI Pacific ex Japan returned 3.8%.
  • What had appeared to be a calmer market environment earlier in the month turned into an outright frenzy as retail investors bid up large cap technology stocks following stock split announcements from momentum darlings Tesla (TSLA) and Apple (AAPL).
  • In a speech delivered in late August following the Fed Chair Jerome Powell’s speech at Jackson Hole, Fed Vice Chair Richard Clarida put the final nail into the Phillips Curve coffin by declaring that the Fed will pursue a symmetrical inflation target (i.e. willingness to let inflation run hot) and that the Fed will not likely preemptively raise rates in the face of a tighter labor market.
  • The start of the month saw U.S. Small Caps and Value outperform Large Caps and Growth, respectively, up until the day Tesla and Apple announced their stock splits. From that point through the end of the month we saw this relative performance reverse itself as Large Cap Growth ran ahead.  Large caps (S&P 500) returned 5.6% while the small caps (S&P 600) returned 4.1%.  Growth stocks continue their outperformance over value stocks as S&P Pure Growth returned 6.5% versus 2.3% for Pure Value.
  • As U.S. large cap growth stocks hit new highs, the oxygen for further advances continues to get thinner as there are rising concerns over ‘narrowing market breadth,’ whether equal-weighted indices underperforming cap-weighted indices or the increasing number of stocks hitting new lows even as the cap-weighted indices reach new highs. Even within growth style of investing, both small and mid-cap growth lagged large cap growth for the month.
  • Among sector performers, ‘Growth’ sectors (Consumer Discretionary, Communication, Technology) performed well ahead of traditional and defensive sectors. Energy and Utilities were the notable laggards.
  • Among factors, Momentum and High Quality ran well ahead of the other factors with Low Volatility a notable laggard (partly due to the rise in longer-term interest rates). The latest market advances are increasingly being driven by momentum sentiment resulting in narrower breadth as a handful of large companies are driving an ever-increasing percentage of market returns.
  • Fixed income gave back some this quarter’s gains as the yield curve steepened following the Fed’s policy shift on inflation accommodation. The U.S. Bloomberg/Barclays Aggregate Index returned -0.8% for the month hurt by the rise in the 10-Year US Treasury Yield to 0.71% from 0.53% at the beginning of the month.  S. High Yield had buckled towards the middle of the month as credit spreads widened but then benefited from the month-end equity rally returning 1.0% for the month, as high yield credit spreads continue to narrow.
  • Commodities rallied the better part of the month but flattened out following the Fed speeches and steepening of the yield curve, while REITs continue to suffer from poor tenant dynamics and higher interest rates. Precious metals (+1.3%) slowed down from their torrid rallies of the past few months.  Oil prices (3-month futures) remain steady in the lower $40/barrel range while industrial metal prices climb higher in anticipation of an industrial recovery.

Note: click here to download the full commentary

By: Benjamin Lavine