Tune Out The Noise And Trust Your Plan
BY: Mark Drachenberg
In today's economic landscape, investors are being pulled in a number of different directions – large-cap stocks vs. small- or mid-caps, domestic vs. international, stocks vs. bonds, traditional investments vs. less traditional ones. These choices can be further complicated by conflicting economic data, much of which can be spun to suit any particular agenda. With all of this to contend with, how do you make decisions on how and where to invest?
Like dieting or dealing with the virus, a solid approach begins with common sense. Eating less and exercising has always been the best method for losing weight; likewise, taking reasonable precautions is critical to staying healthy during this pandemic. The same principles hold true when it comes to investing: Setting reasonable goals, taking action, and sticking to the plan generally works best, without letting all the economic noise get in the way. Here, we'll take a quick look at some of the economic data, and try to make sense of it.
The markets had a decent month in July, as the Dow rose 2.51% and the S&P 500 increased 5.64%. All other equity indexes performed well, too. Incredibly, the NASDAQ is up 20.40% this year, and almost 33% over the past year. Talk about getting confused with the data! The Barclays U.S. Aggregate Bond index was up 1.49% in July and is up just shy of 8% YTD. Other economic data seems to be pointing in the right direction as well.
In light of this activity, we need to ask two primary questions:
- Why are the markets performing as well as they are, given the uncertainty surrounding the virus and its effect on the economy?
- Why is there such a large disconnect between the S&P 500 and the Dow Jones Industrial Average?
Starting with the first question: There is not necessarily a neat and tidy answer, but there are some things to which we can point. First, the markets are forward-looking vehicles that are anticipating a stronger economy later this year and beyond, which should translate to higher earnings. In a sense, the markets have discounted much of this year as a one-off event that will be put in the rear-view mirror in the not-too-distant future. The second reason is perhaps more telling and, though somewhat connected to future economic growth, is more a function of the money that is pouring into our economy from the government – in the form of stimulus checks, PPP loans, and higher unemployment benefits – and the Federal Reserve.
Looking now at the second question: Normally these indexes move somewhat in tandem, though not perfectly, by any means. The Dow is a price-weighted index in which stocks with a larger share price have more impact than those with lower-priced shares. Interesting to note is that Apple (AAPL) currently has the highest share price in the Dow, but recently announced a 4-for-1 stock split to occur on August 24, so it won’t wear the crown for much longer – UnitedHealth (UNH) will. We will keep a close eye on how that change impacts the index. The S&P 500 is a market cap-weighted index, meaning that those companies with the largest market caps – like Amazon, Apple, Facebook, and Microsoft – will dominate the index. So far in 2020, the handful of companies that dominate the S&P 500 have been driving that index’s performance, while the Dow has not had that level of dominance exerted upon it.
Other issues, like the unemployment rate, seem to also contribute to contradictory messages. How can the rate be falling so much (yes, it was at astronomical levels, and still is, somewhat) when the economy seems to be performing so poorly? The issue may be related to PPP loans, companies furloughing employees vs. letting them go, and/or a variety of other reasons. The good news is, the number is coming down, no matter how you count it. The nation’s GDP is also somewhat confusing, not so much in what it is telling us, but in the number itself. You likely have heard that the GDP fell 32.9% in the second quarter. Well, that is not exactly accurate. On an annualized basis, it did fall that much, but for the second quarter alone, the number was a negative 9.5%. Still terrible, but far less than negative 32.9%. These issues, and many others, are painting a confusing and frustrating picture for economists and investors. That's why, again, it's important to let common sense be your investment guide.
As always, we are here and available to discuss your portfolio or any other issue you may have. Please call the Wealth Management team at (608) 826-3570, or email me directly to start the conversation.