The Equity market is continuing to surge higher based on U.S. economic improvement, a trade deal with China that is still functioning and optimism that a COVID-19 vaccine will be available soon.
The S&P 500 Index is now up 8.3% while the Nasdaq Index has jumped 31% for the year. With the March low in the equity market and the second quarter low in terms of corporate earnings, economic growth is improving. Full normalization will require an effective vaccine and time to administer it, which should happen in 2021. As a historical comparison, the Spanish Flu in 1918 lasted two years, disappeared and was followed by one of the most prosperous eras in the U.S., the Roaring Twenties.
The Federal Reserve has assured economists and investors that it is in full support of the markets monetarily, but the divisive politics of an election year has delayed another fiscal relief package. This debate will slow the rebound, extend the duration of the high unemployment rate and may bankrupt small businesses. While the yield curve remains suppressed, the 10-Year US Treasury bond now yields an unattractive 0.68%. This is a negative nominal yield after inflation and taxes and one of the main reasons why equities have had such a rebound.
The equity market social-distancing out performers are those companies that benefit most from the pandemic. These are the S&P 5 (Alphabet, Apple, Amazon, Facebook, and Microsoft). They have the balance sheets, cash flows and business models that are enhanced by the digital evolution. There is a lot of speculation in other momentum/growth digital stocks that do not make much if any profit, so caution is warranted with these. The best-performing sectors in the S&P 500 Index are information technology, consumer discretionary and consumer staples. Small caps and mid-caps generally are underperforming, as are the more value-oriented sectors like energy, financials and basic materials. The looming elections and the social protests are not affecting the markets, but some volatility in the fall should be expected.
The re-composition of the Dow Jones Industrial Average (DJIA) to add Amgen, Honeywell, and Salesforce is a late acknowledgement of the digital revolution and an attempt to become more relevant. Although it is widely followed, the DJIA is a flawed, price-weighted index of only 30 companies. The addition of these companies reflects the importance of biotechnology, sensor, security, productivity enhancement, and cloud technology to the index. The more relevant and broader index to monitor is the S&P 500 Index, which has all sectors represented and 500 of the largest U.S. companies.
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