More than half of the days in August saw more S&P 500 stocks down than up, yet the index itself posted a 7% gain for the month (its fifth consecutive monthly increase and largest since April). Index-level gains have been dominated by a handful of large (and increasingly dominant) stocks.
Even still, sector-level and industry group trends have been improving.
Last week more than half of the sectors in the S&P 500 made new highs. The number of individual stocks making new highs has, admittedly, been relatively narrow. One reason for this: nearly 40% of S&P 500 stocks are still 20% or more below their 52-week highs.
It is difficult to make new highs when you are not anywhere close to them to begin with. These internal dynamics within the S&P 500 seem appropriate in a year marked by abrupt turns higher and lower, as well as status quo challenging macro developments. By many metrics this has been one of the most challenging market environments we have ever experienced.
For some, the primary takeaway from the first eight months of 2020 is confirmation of the desire to be neither proactive nor reactive but just hold tight through all circumstances. The roller coaster ride that is the stock market at times is accepted as a necessary cost. It is part of an unavoidable journey within a market trend that, when viewed with a long enough perspective, has always been higher.
Our view, communicated through regular publications and conversations over the course of two decades, is that risks and opportunities are not evenly distributed across time. Investor outcomes (in terms of returns realized and risks borne) can generally be improved by leaning on the weight of the evidence.
As we have discussed in the past (including in our 2020 market outlook), the goal is to navigate risks and opportunities, not time market tops and bottoms. This means tilting (within equities and across asset classes) toward sustainable leadership. We do not need to be stuck in a pattern of passive acceptance (when it comes to investing or life more broadly). We can be adaptive to both the environment and our own changing risk tolerances.
We do want to avoid viewing 2020 and risk management decisions solely through an equity market lens. While the S&P 500 is up nearly 10% year-to-date, that is only half of the return provided by long-term Treasury Bonds and one-third the year-to-date return for gold. No investment is risk-free and despite headlines to the contrary, there are always other alternatives.
In mid-August, our weight of the evidence shifted from bullish back to neutral. Improving broad market strength partially offset evidence of excessive investor optimism and a more challenging seasonal trajectory in advance of the upcoming Presidential Election. After the remarkable and record setting stock market run off the March lows, volatility could be poised to re-emerge.
Some consolidation would not be surprising and could lead to a healthy re-set in investor sentiment. If equity exposure has moved beyond recommended levels or if 2020 has led to a re-assessment of risk tolerances, rebalancing away from equities may be appropriate at this juncture.
Even with an anticipated uptick in volatility, however, the weight of the evidence does not support an overtly defensive stance toward equities. Barring evidence of broad market deterioration, such a move appears premature. We would re-evaluate this view if we saw some combination of the following:
1. Fading momentum – when indexes are heavily tilted toward just a handful of stocks, index-level momentum indicators can matter more than issue-level breadth indicators. We are watching weekly momentum for the S&P 500 for evidence that the rally has run out of steam.
2. Narrowing global support – The percent of global markets above their 50-day averages has slipped from 80% to just 53% over the second half of August. If this gets below 50% it would be concerning.
3. Sector-level deterioration – Rallies typically feature leadership rotation beneath the surface and they sputter when no sector steps up to receive the baton. While our sector-level trend model remains in positive territory, it suggests rotation is occurring and any pullbacks are likely to be limited in degree and duration. Downside risks increase when it slips into negative territory.
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.