By: Stash Graham
The headline S&P 500 index continues its rise on the back of the information technology sector. The narrow breadth of the rally continues as a majority of S&P 500 sectors (9 of 11 sectors) continue to trade within a single-digit percentage point range since May. Almost half of the S&P 500 is still trading down more than 20% since the February highs. The degree of separation in performance among companies in the S&P 500 is the worst that we have witnessed since the Dotcom Bubble in 2000. There have been only three times in the last 30 years where the headline S&P 500 index reached their all-time highs while less than 10% of S&P 500 constituents trade at their 52-week highs and fewer than 65% of S&P 500 constituents trade above their 200-day moving average. This occurred in 1999-2000 before the Dotcom bubble, before the Great Financial Crisis in 2007-2008, and multiple days last week (week of August 24th). Gold continues their march higher as a historically notable skeptic, Warren Buffett, bought into a gold miner (Barrick Gold). The change in attitude about gold as an investable asset makes sense when considering we are experiencing the most radical monetary (Federal Reserve) and fiscal (Capitol Hill) stimulus that we have ever seen.
However, we believe the S&P 500 index increases are not reflective of a sound or growing economy. Industry leader Jamie Dimon, CEO of JP Morgan Chase, a bank that provides services to almost 50 percent of American households, stated that he does not believe the economic recession is over and the recession could last for months. He discussed how government policies are delaying the onset of some of the most damaging consequences of the recession, such as bankruptcies and foreclosures. He said: “In a normal recession unemployment goes up, delinquencies go up, charge-offs go up, home prices go down; none of that’s true here. Savings are up, incomes are up, home prices are up. So you will see the effect of this recession; you’re just not going to see it right away because of all the stimulus.” We think that the effects Mr. Dimon discusses could begin to be seen this fall given the lack of Congressional action. For example, credit card delinquencies began to increase in August for the first time since COVID-19, as payments from the stimulus bill expired July 31, costing American households an estimated $70 billion in income for August per Goldman Sachs.
Additional economic data points on jobs and consumer spending suggest the growth seen in June and July coming to an end. The red trendline on the chart shows, on average, a renewed drop in job listings in the last 8 weeks. For an economy to become self-sustaining without further federal government stimulus, there needs to be jobs for the over 25 million Americans collecting unemployment benefits, a number that is still growing by 1 million Americans per week. A variety of large businesses, including Walmart, Salesforce, and American Airlines, are just starting to announce layoffs,
This chart shows changes in consumer spending since the beginning of the year. There are two main points to take from this chart; first, spending by low-income individuals has gone back up to pre-COVID levels and second, consumer spending has been relatively stagnant for the last two months. On spending by low-income individuals, when the stimulus payments from the government started, low-income consumers immediately increased their spending, and that spending is important for an economy based on consumption. We believe that without further government stimulus, that low-income consumer spending, which helped the economy, will not return. Second, consumer spending in general was at the same level on June 21st and August 16th, as indicated by the solid black line and dotted line, respectively. No growth in consumer spending, and the decrease in low-income consumer spending that will not return without government intervention, is a large reason that the economy has flatlined in growth since June or July.
Intel Corporation (Ticker Symbol: INTC)- We sent out a digital analysis briefing on Intel Corporation earlier this month. If you did not receive this one-page summary in your email, please reach out to the team and we will provide you with a copy. Since investing in Intel, there have been a couple of positive developments. First, the company announced an accelerated $10 billion share buyback plan. As mentioned in the thesis, Intel has a very strong liquidity and credit rating profile, so Intel can perform these types of actions while other businesses are just trying to stay afloat financially. Second, at the end of the month, details about their new mobile Tiger Lake chips were “leaked.” The market liked the information and the company’s stock traded higher a couple of percentage points the following day. As market-moving events are certainly upon us, we will continue to monitor all financial assets accordingly. We appreciate your continued faith in maintaining discipline. There are a couple of sectors that continue to trade nearly 20% below their February highs that have drawn our attention. We have started allocating into one of these new sectors as I write to you now. Any new investment will include an investment brief that will be digitally sent to investors. Paper copies will be included with the September monthly letter.
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