August Economic Update
Market Summary
Stocks continued their rally in July as further development of a COVID-19 vaccine and better-than-expected corporate financial reports encouraged investors. Despite multiple states reporting increases in infections, multiple regional Federal Reserve presidents warning of a bumpy economic recovery, and Gross Domestic Product (GDP) contracting by a record 32.9 percent in the second quarter, stocks continued their climb with mega-cap technology companies such as Apple and Amazon outperforming the broader equity sectors.
The S&P 500 gained 5.5 percent, while the tech-heavy Nasdaq Composite increased 6.8 percent. The Dow Industrial Average, which has lagged much of the year, rose 2.4 percent. (1,2)
News Developments
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. Fed Chairman Jerome Powell stressed the importance of Congress passing more economic stimulus packages - similar to the $1,200 checks received last spring - in order to keep the economy functioning. (3),
There has been increasing scrutiny towards the mega-cap technology companies Apple, Amazon, Facebook, Google, Microsoft, and Netflix. These five stocks have outperformed the rest of the stock market significantly, and Congress has been investigating several of these companies for anti-trust violations and growing concerns of monopolistic business practices. Six of mega-cap stocks represent more than 40% of the Nasdaq market capitalization, and five of these stocks account for 22% of the S&P 500 index’s market capitalization. Since March, investors have flocked to these stocks as they appear to have solid financial performance in the midst of an economy coping with COVID-19. (4)
What’s Ahead for August?
With the S&P 500 nearing a full retracement from the drop earlier this year and with earnings season now behind us for another quarter, what might next month have in store?
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. (\2)
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.
Monthly Financial Tip:
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Citations:
1 - The Wall Street Journal, July 31, 2020
2 - The Wall Street Journal, July 30, 2020
3 - CNBC.com, July 29, 2020
4 - CNBC, July 22, 2020
5.- CNBC.com, August 31, 2019
6.- MarketWatch, August 1, 2019
Disclaimers:
This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. 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 indices are unmanaged and are not illustrative of any particular investment.
