Date: August 11, 2020
What Is Sector Rotation and Style Rotation?
As explained on Investopedia.com: “Sector rotation is the movement of money invested in stocks from one industry to another as investors and traders anticipate the next stage of the economic cycle. Various sectors, or industries… thrive or languish depending on the cycle.” One can find charts on the internet that show sector rotations during economic cycles. Some Traders believe the economy moves in reasonably predictable cycles. The major sectors are Finance, Technology, Consumer Discretionary, Industrials, Materials, Energy, Consumer Staples, Health Care, Utilities, Metals and Mining, Biotech, Telecom, Home Construction, Retail and Real Estate. Style Rotation is comparable Sector rotation. Style Rotation is based on a company’s Market Capitalization. It is based on Mega Cap, Large Cap, Mid-Cap, Small Cap and Micro-Cap companies. Many traders follow both Sector and Style rotation.
Examples of Sector Rotation are shown below comparing a Technology sector ETF to an Energy sector ETF.
This is an example how these sectors performed after making a bottom on March 18th. Sector rotation changes usually take time to develop. It does not happen in one day. Will the Technology sector continue with the strength it has shown or will a new sector become the new leader? Only time will tell…
The VIX Index closed at 24.46 on July 31. It has been trading in a range between 22 and 26. It closed today at 24.03. This is an indication that markets will continue to be volatile.
Percent of stocks above their 50 day and 200 day moving average. 79% of stocks are above their 50-day moving average and 59% of the stocks are above their 200-day moving average, which is higher than last month. 60% of stocks above their 200-day moving average is bullish.
Federal Reserve: The next FOMC meeting is on September 16, 2020.
Unemployment Rate: As reported August 7 by the US Dept of Labor. Total nonfarm payroll employment rose by 1.8 million in July, and the unemployment rate fell to 10.2 percent, the U.S. Bureau of Labor Statistics reported today. These improvements in the labor market reflected the continued resumption of economic activity that had been curtailed due to the coronavirus (COVID-19) pandemic and efforts to contain it. In July, notable job gains occurred in leisure and hospitality, government, retail trade, professional and business services, other services, and health care.
Inflation Rate: According to U.S. Labor Department data published on July 14, 2020 the annual inflation rate for the United States is 0.6% for the 12 months ended June 2020 as compared to 0.1% previously,
Overall, while the markets are still showing strength, but caution is advised.
In this month’s recap: stocks rose as better-than-expected corporate earnings and progress on a COVID-19 vaccine encouraged investors.
Monthly Economic Update
Presented by Guy Woolley, August 2020
U.S. Markets
Stock prices rallied in July as further development of a COVID-19 vaccine and better-than-expected corporate financial reports encouraged investors.
The S&P 500 gained 5.5 percent, while the Nasdaq Composite picked up 6.8 percent. The Dow Industrial Average, which has lagged much of the year, rose 2.4 percent.1
Confident Investors
Stock prices started the month elevated, thanks to early results from a COVID-19 vaccine trial, a better-than-expected jobs report, and a higher-than-anticipated reading on manufacturing activity.
Despite multiple states reporting increases in infections, stocks continued their climb, especially in the mega-cap technology companies. Meanwhile, investors remained confident, even as multiple regional Federal Reserve presidents warned of a bumpy economic recovery.
Earnings Update
As of July 31, more than half of the companies comprising the S&P 500 Index reported their earnings. Of these companies, 84 percent reported earnings in excess of analysts’ estimates, with the Health Care and Technology sectors leading the way.2
In the final week of trading, investor sentiment alternated between worry and optimism. A disappointing jobless claims report and a stunning second-quarter GDP number caused some worry. But the mega-cap technology names reported exceptional earnings, capping off a strong month for the equity markets.
Sector Scorecard
Industry sectors were uniformly higher in July, except for a loss in the Energy sector (-4.36 percent). Gains were made in Communication Services (+6.09 percent), Consumer Discretionary (+6.72 percent), Consumer Staples (+7.03 percent), Financials (+3.80 percent), Health Care (+6.07 percent), Industrials (+4.80 percent), Materials (+7.01 percent), Real Estate (+4.28 percent), Technology (+3.11 percent), and Utilities (+7.62 percent).3
What Investors May Be Talking About in August
In the last ten years, August has gained a reputation for being one of the more volatile months of the year.
For instance, in August of 2019, the S&P 500 Index posted moves of more than one percent in 11 of the 22 trading days, with three daily drops of more than 2.6 percent. At the time, trade friction with China was escalating, and some market watchers suggested that the bond market was signaling a recession on the horizon.4,5
One of the reasons for the past volatility is that some traders are away on vacation, resulting in lighter volume, which may have the effect of amplifying market volatility. But this year may be different since many people are staying closer to home due to the pandemic.
This August will stand on its own merits. But investors should be prepared for headlines that could result in outsized moves.
T I P O F T H E M O N T H
Why not find out exactly what is on your credit report? You are entitled to one free copy from each credit bureau annually.
World Markets
Overseas markets were mixed. Optimism for the development of a COVID-19 vaccine was offset by continued tension between the U.S. and China. The MSCI-EAFE Index advanced 2.23 percent.6
European stocks trended lower as multiple economies continued to reopen, and the European Union agreed to a fiscal stimulus package for member nations. German shares edged higher, while France lost ground.7
Pacific Rim stocks were mixed. Australia rose 0.51 percent, while Japan fell 2.59 percent. The volatile Argentinian market rose nearly 28 percent.8
Indicators
Gross Domestic Product: The economy contracted by an annualized rate of 32.9 percent in the second-quarter GDP.9
Employment: The unemployment rate declined in June to 11.1 percent (from May’s 13.3 percent rate) as the economy added 4.8 million jobs.10
Retail Sales: Consumer spending rose 7.5 percent in June, aided by the reopening of malls and restaurants. Sales were largely driven by autos, clothing, furniture, and electronics.11
Industrial Production: Output by the nation’s manufacturers, utilities, and mines increased by 5.4 percent. Manufacturing jumped by 7.2 percent.12
Housing: Housing starts leaped by 17.3 percent; though, new construction remains behind last year’s pace.13
Posting its largest monthly jump ever, existing home sales soared 20.7 percent in June.14
New home sales rose 13.8 percent, touching its highest sales pace in 13 years.15
Consumer Price Index: Consumer inflation jumped 0.6 percent in June, which economists attributed to a snapback in prices from COVID-19-related declines in the previous three months. Gasoline prices soared 12.3 percent, accounting for more than half of the month’s increase in the CPI.16
Durable Goods Orders: Durable goods orders increased 7.3 percent, as an 86 percent leap in orders for new cars and trucks offset a sharp drop in aircraft manufacturing.17
Q U O T E O F T H E M O N T H
“I like a teacher who gives you something to take home to think about besides homework.”
LILY TOMLIN
The Fed
As expected, the Federal Reserve left its benchmark interest rate unchanged at its two-day meeting, which ended July 29. The Fed also reiterated its commitment to bond purchases and the lending and liquidity programs it currently has in place.18
| MARKET INDEX | Y-T-D CHANGE | July 2020 |
| DJIA | -7.39% | 2.38% |
| NASDAQ | 19.76% | 6.82% |
| S&P 500 | 1.25% | 5.51% |
| BOND YIELD | Y-T-D | July 2020 |
| 10-YR TREASURY | -1.38% | 0. 54% |
Source: Yahoo Finance, July 31, 2020
The market indexes discussed are unmanaged and generally considered representative of their respective markets. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results. U.S. Treasury Notes are guaranteed by the federal government as to the timely payment of principal and interest. However, if you sell a Treasury Note prior to maturity, it may be worth more or less than the original price paid.
T H E M O N T H L Y R I D D L E
How is it possible to name three consecutive days without using the words Monday, Tuesday, Wednesday, Thursday, Friday, Saturday, or Sunday?
LAST MONTH’S RIDDLE: Haretown and Tortoiseville are 44 miles apart. A hare travels at 8 miles per hour from Haretown to Tortoiseville, while a tortoise travels at 3 miles per hour from Tortoiseville to Haretown. If both set out at the same time, how many miles will the hare have to travel before meeting the tortoise en route?
ANSWER: 32 miles. They will meet each other in 4 hours. The hare will have traveled 32 miles in that time (4 x 8mph); the tortoise, 12 (4 x 3mph).
Guy Woolley may be reached at 415-236-5364 or guy@freedomcapitalmanagement.com www.freedomcapitalmanagement.com
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This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. The information herein has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate, and when redeemed, may be worth more or less than when originally invested. This information should not be construed as investment, tax, or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs, or expenses. Investors cannot invest directly in indices. All economic and performance data is historical and not indicative of future results. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The Nasdaq Composite Index is a market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor’s 500 (S&P 500) is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world’s largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The FTSEurofirst 300 Index comprises the 300 largest companies ranked by market capitalisation in the FTSE Developed Europe Index. The FTSE 100 Index is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. Established in January 1980, the All Ordinaries is the oldest index of shares in Australia. It is made up of the share prices for 500 of the largest companies listed on the Australian Securities Exchange. The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. The Hang Seng Index is a free float-adjusted market capitalization-weighted stock market index that is the main indicator of the overall market performance in Hong Kong. The FTSE TWSE Taiwan 50 Index is a capitalization-weighted index of stocks comprises 50 companies listed on the Taiwan Stock Exchange developed by Taiwan Stock Exchange in collaboration with FTSE. The MSCI World Index is a free-float weighted equity index that includes developed world markets and does not include emerging markets. The Mexican Stock Exchange, commonly known as Mexican Bolsa, Mexbol, or BMV, is the only stock exchange in Mexico. The U.S. Dollar Index measures the performance of the U.S. dollar against a basket of six currencies. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability, and differences in accounting standards. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. MarketingPro, Inc. is not affiliated with any person or firm that may be providing this information to you. The publisher is not engaged in rendering legal, accounting, or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.
CITATIONS:
1. The Wall Street Journal, July 31, 2020
2. FactSet Research, July 31, 2020
3. FactSet Research, July 31, 2020
4. CNBC.com, August 31, 2019
5. MarketWatch, August 1, 2019
6. MSCI.com, July 31, 2020
7. MSCI.com, July 31, 2020
8. MSCI.com, July 31, 2020
9. The Wall Street Journal, July 30, 2020
10. The Wall Street Journal, July 2, 2020
11. The Wall Street Journal, July 16, 2020
12. The Wall Street Journal, July 15, 2020
13. CNBC.com, July 17, 2020
14. The Wall Street Journal, July 22, 2020
15. MarketWatch.com, July 24, 2020
16. The Wall Street Journal, July 14, 2020
17. MarketWatch.com, July 27, 2020
18. CNBC.com, July 29, 2020