July 17, 2020
Making Cents of the Markets
Listen to our latest Making Cents of the Markets segment on CKNW. We discussed the markets and the ideal asset allocation for your portfolio. Listen here.
Be in the Know
North American markets advanced another 1-2% this past week mainly due to better-than-expected economic data, a strong start to earnings season, and renewed optimism around a potential vaccine for COVID. Economic data was relatively light this week but continued to impress with US retail sales and housing starts showing continued growth in June. The focus was mainly on earnings season which began with over 100 companies reporting their 2nd quarter financial results this week as most of them beat analyst estimates. While still in the early innings, the initial strength from these results agree with recent economic data and confirm that the recovery is taking place faster than expected.
The highlights within earnings season included most of the largest US banks, healthcare companies like Johnson & Johnson and Abbot Labs, and consumer discretionary companies like Pepsi and Domino’s Pizza. The main takeaway from these results are that large US companies are faring better than expected and adapting well to the “new normal”. US banks for the most part have weathered the storm well though they saw profit declines as banks are now required to set aside billions for future loan losses. Unlike the financial crisis, banks must hold excess cash for losses that are reasonably expected to occur but have not actually happened yet. This pro-active shift shows how the banks have improved since 2008 though we understand that it will take some time for their performance to turnaround which is why we remain underweight financials at this time.
Moderna Inc, a large pharmaceutical company furthest along in the process, said its potential vaccine from an earlier stage trial had a robust response in creating antibodies to fight against the virus. The company is optimistic that a vaccine will be found by the end of 2020 or early 2021 as they begin phase 3 clinical trials at the end of July. There are more than 155 vaccines being developed globally with 23 in human trials which continues to give the market confidence that a vaccine will be eventually be found. This optimism lifted markets higher throughout the week and fueled economically sensitive sectors like industrials, financials, and homebuilders to lead the advance.
Market health improved in a notable manner this week as we are now seeing broader participation from most of the underlying sectors. The is a very positive sign which supports our portfolio positioning as we are closer to being fully invested with equity allocations slightly above our target levels. We are still relatively conservative to past years’ allocations with higher holdings in gold, bonds, and cash than before as the easiest part of the recovery is likely behind us. The S&P closed the week at the upper end of the trading range as we look for the market to break out higher that may signal the next leg up in markets.
Over the past few months we have made many changes to portfolios and are quite content with the quality and diversification of our holdings. We plan to remain patient throughout earnings season as we continue to assess our portfolio companies and make changes if needed. We look forward to the coming weeks as we will hear from some of the largest and most influential companies that include Amazon, Microsoft, and Google which we hold at this time.
Chart of the Week
As we have noted in previous commentaries, markets have remained range-bound for the last two months but have made positive strides in the last three weeks as we are back to the upper end of the trading range. One can see this below in the 12-month chart of the main US market, the S&P 500:
Source – Stockcharts.com
One can see that the 200-day moving average, an area commonly followed by institutional traders, was a strong area of accumulation and support for the market as it has bounced off of this level twice over the last two months. We are now back up to the previous high which could be an area of resistance however we believe that it would be a bullish sign if the index is to break out and make new highs. We look forward to seeing if we can break above this level and continue higher in the near-term.
Beyond the Markets
While the weather may not be living up to our expectations for summer 2020, the food sure is! From now until September there are plenty of events across the Lower Mainland where you will have the opportunity to try the newest and tastiest food. One such event is The Brentwood Great Takeout which will showcase the best food trucks every Saturday until the end of summer. Taps & Tacos, REEL Mac And Cheese and The Truckin’ BBQ will be there, so make sure to check it out! If you prefer to stay in your car while grabbing some tasty treats, you can also head to New Westminster for the Braid StrEAT Experience! drive-thru food truck event.