The Heavyweight Bout Continues

August 5, 2020

In May, we talked about there being a heavyweight bout going on between investor euphoria, buoyed by economic stimulus packages, vs. the struggling economy. That fight seems to be far from over despite investors' continued enthusiasm for “Big Tech” which is keeping stocks at lofty levels.

The struggling economy threw some heavy punches at the end of July that looked like they may have done some damage. And, one of the corner men for elevated investor moods appears to have stepped away as lawmakers have not been able to agree on a stimulus deal. However, the punch of blowout earnings from some of the Big Tech companies to close out July landed squarely on the jaw and this seemed to illustrate that current investor exuberance has some stamina. 

July was the fourth straight month of gains for U.S. stocks since the market bottom in March. Equity prices remain well within reach of all-time highs. However, an increase in reported COVID19 cases and deaths in the United States has slowed the pace of gains, particularly with regard to U.S. markets. In July, for the first time in a very long time, Emerging Market stocks significantly outperformed U.S. stocks as the MSCI Emerging Market Index rose 8.94% compared the 5.64% gain in for the S&P 500. 

To close out July, the big four tech firms (Google parent Alphabet, Amazon, Apple, and Facebook) posted knockout earnings in a quarter when much of the economy was shut down helping stocks close July on a positive note. However, a record contraction in U.S. Gross Domestic Product (GDP) and more terrible unemployment numbers show an economy in deep trouble. The conversation has shifted from how quickly a recovery might arrive to speculation  of a double-dip recession. For the nineteenth consecutive week, weekly jobless claims were in excess of 1 million.  That is an unbelievable streak with huge social costs. 

And the data is now getting worse not better. The worst economic data in anybody’s memory failed to move congress into action, and there is greater concern that our lawmakers will not reach a deal on a badly needed new stimulus package. Meanwhile, Gold is up again trading at all-time highs as the dollar continues to fall.  Gold up & dollar down are typical signals that investors feel very uncomfortable with the economic situation.

In the corner of the struggling economy, we have seen an election year and renewed China U.S. trade battles step in to back the challenger in this fight. In the other corner, the Federal Reserve has done everything it can to support its fighter by growing its balance sheet to almost 40% of total U.S. GDP.  By year end the Fed balance sheet could be approaching 50% of U.S. GDP.  In addition, the Fed is keeping real interest rates at record low near-zero levels. That is like adding lead weights into your fighter’s gloves to make landed punches very extraordinarily heavy on the opponents jaw.


Quite simply, we must continue to wait and see how this heavyweight bout plays out. This one will likely go the full 15 rounds before we have a clear winner.  In the meantime, the market and the economy remain disconnected, but the FEDs considerable influence is one you don’t want to fight. So, investors must stay in the fight while continuously looking for the potential haymaker that can come from anywhere, and that is what we are doing – cautious participation with an eye always on risk.


With stocks climbing for the fourth month in a row, our trend-following technical measures are all in positive territory. We have witnessed some degradation within our market breadth data as the indices are being led higher by a smaller number of companies.  For example, the big four (Alphabet, Apple, Amazon and Facebook) have accounted for 40% of the S&P 500, which means the other 495 companies are not providing the broad market breadth support we would normally like to see. However, there are enough companies benefiting from the COVID crisis to offset those that are not and this balance has thus far been sufficient to keep our breadth measures within the positive reading range.

The MSCI Emerging Markets Net Total Return Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.

The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices.

Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period.

There are certain limitations to technical analysis research, such as the calculation results being impacted by changes in security price during periods of market volatility. Technical measurements are one of many indicators that may be used to analyze market data for investing purposes and should not be considered a guaranteed prediction of market activity.

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