June 2020 Global Equity Markets Review
Global equity markets continued the rally that began in late March although with less vigor than the hard bounce off the bottom in April. Nevertheless, the quarter ended June 30th was the best calendar quarter since the 4th quarter of 1998.
Non-U.S. markets got a further boost as the dollar fell again in June – in part due to an unwinding of the early March rally in the currency which was the sharpest rise over nine days in 35 years. The timing of the reopening of global economies may also be playing a part, especially since recent data casts doubt on whether parts of the U.S. have opened too quickly. Finally, it is worth noting the staying power of the NASDAQ 100 Index which continued to lead the market higher.
The chart below illustrates a ratio of the NASDAQ 100 Index divided by the S&P 500 which is now back to a 20 year high. However, today’s market is far removed from the mania two decades ago which surrounded the initial adoption of the internet and the explosion, and eventual implosion, of many new, unprofitable web-based companies. Nevertheless, it is significant many of the largest stocks in the market are technology-driven, beneficiaries of the economic disruption caused by COVID – 19 and are selling at high valuations compared to the broad market.
Mind the Gap
The market has rallied despite grim economic data and troubling trends on the impact reopening of businesses is having on confirmed cases of COVID –19. This has prompted debate on whether the stock market’s crystal ball is built more on hope than a rational assessment of an eventual recovery to a more normal environment. Reconciling this widening gap between now and where we might be next year will be getting a test in the next 45 days. Companies are about to report their first-quarter under the full impact of the COVID–19 shut down of the economy. Understandably, companies have been unusually reticent to make public comments about the impact coronavirus will have on profitability in the quarters ahead. Forward guidance has been a critical input for Wall Street analysts in building earnings models and basing recommendations. This has led to an unusually wide divergence regarding this year’s earnings estimates and the forecast for 2021.
The chart to the right illustrates the growth in forecasts between this fiscal year and next is unusually optimistic. Companies in the S&P 500 Index have seen an expected earnings growth of almost 12% over the past 20 years and companies in the S&P 600 Small Cap Index have an expected earnings growth over 19% over the same period. Importantly, the relationship between expected earnings this year and next has been highly correlated over the past 20 years until now. It will be a meaningful test for the market as we enter 2nd quarter reports if estimated earnings for 2021 come down measurably once we have two quarters of actual data for this fiscal year.
Index Returns – all shown in US dollars
All returns shown trailing 6/30/2020 for the period indicated. “YTD” refers to the total return as of prior-year end, while the other returns are annualized. 3-month and annualized returns are shown for:
- The S&P 500 index is comprised of large capitalized companies across many sectors and is generally regarded as representative of US stock market and is provided in this presentation in that regard only.
- The S&P 500® Equal Weight Index (EWI) is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight – or 0.2% of the index total at each quarterly rebalance. The S&P 500 equal-weight index (S&P 500 EWI) series imposes equal weights on the index constituents included in the S&P 500 that are classified in the respective GICS® sector.
- The S&P 500 Growth Index is comprised of equities from the S&P 500 that exhibit strong growth characteristics and is weighted by market-capitalization.
- The S&P 500 Value Index is a market-capitalization weighted index comprising of equities from the S&P 500 that exhibit strong value characteristics such as book value to price ratio, cash flow to price ratio, sales to price ratio, and dividend yield.
- The Russell 3000 Index tracks the performance of 3000 U.S. corporations, determined by market-capitalization, and represents 98% of the investable equity market in the United States.
- The Russell Mid Cap Index measures the mid-cap segment performance of the U.S. equity market and is comprised of approximately 800 of the smallest securities based on current index membership and their market capitalization.
- The Russell 2000 Index is a market-capitalization weighted index that measures the performance of 2000 small-cap and mid-cap securities. The index was formulated to give investors an unbiased collection of the smallest tradable equities still meeting exchange listing requirements.
- The MSCI All Country World Index provides a measure of performance for the equity market throughout the world and is a free float-adjusted market capitalization weighted index.
- The MSCI EAFE Index is a market-capitalization weighted index and tracks the performance of small to large-cap equities in developed markets of Europe, Australasia, and the Far East.
- The MSCI Emerging Markets Index is a float-adjusted market-capitalization index that measures equity market performance in global emerging markets and cannot be purchased directly by investors.
- The S&P Global BMI sector indices are into sectors as defined by the widely used Global Industry Classification Standards (GICS) classifications. Each sector index comprises those companies included in the S&P Global BMI that are classified as members of respective GICS® sector. The S&P Global BMI Indices were introduced to provide a comprehensive benchmarking system for global equity investors. The S&P Global BMI is comprised of the S&P Emerging BMI and the S&P Developed BMI. It covers approximately 10,000 companies in 46 countries. To be considered for inclusion in the index, all listed stocks within the constituent country must have a float market capitalization of at least $100 million. For a country to be admitted, it must be politically stable and have legal property rights and procedures, among other criteria.
- The Barclay’s US Aggregate Index, a broad based unmanaged bond index that is generally considered to be representative of the performance of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
- The Bloomberg Barclay’s US Corporate High Yield Index, which covers the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market.
Key Indicators correspond to various macro-economic and rate-related data points that we consider impactful to equity markets.
- The US 10-Year Treasury Yield (%)/bps, is the return on investment for the U.S. government’s 10-year debt obligation and serves as a signal for investor confidence.
- SPDR Gold Trust Price ($), is an investment fund that reflects the performance on the price of a gold bullion, less the Trust’s expenses.
- West Texas Intermediate, which is an oil benchmark and the underlying asset in the New York Mercantile Exchange’s oil futures contract.
- CBOE Volatility Index (Level)/% Change, which uses price options on the S&P 500 to estimate the market’s expectation of 30-day volatility.
Wilbanks, Smith & Thomas Asset Management (WST) is an investment adviser registered under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply any level of skill or training. The information presented in the material is general in nature and is not designed to address your investment objectives, financial situation or particular needs. Prior to making any investment decision, you should assess, or seek advice from a professional regarding whether any particular transaction is relevant or appropriate to your individual circumstances. This material is not intended to replace the advice of a qualified tax advisor, attorney, or accountant. Consultation with the appropriate professional should be done before any financial commitments regarding the issues related to the situation are made.
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We consider an index to be a portfolio of securities whose composition and proportions are derived from a rules-based model. See the appropriate disclosures regarding models, indices and the related performance. You cannot invest directly in an index and the performance of an index does not represent the performance of any specific investment. Some of the information enclosed may represent opinions of WST and are subject to change from time to time and do not constitute a recommendation to purchase and sale any security nor to engage in any particular investment strategy.
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