In this week’s market update: The S&P hits a new high but it’s a worryingly narrow rally; dividends suffer their worst fall since 2009; and central banks gather for a virtual Jackson Hole summit.
2020 is going to go down in the stock market history books as a very strange year indeed. First, we suffered a very quick and severe bear market as Covid-19 took hold in Europe. Now we have enjoyed one of the quickest-ever complete recoveries, with the US S&P500 hitting a new all-time high at the end of last week, just five months after bottoming out in March.
The speed of the bear market and subsequent rally are noteworthy in themselves. But what is really interesting is the way in which the market has recovered while so many of the companies in the benchmark indices are struggling.
Shares in a fifth of the companies in the S&P 500 are still 50% below their all-time high price, even as the index itself moves into uncharted territory. The average stock in the index is more than 28% below its peak level. So, while a handful of companies - mainly technology and some consumer staples groups - are doing very nicely thank you out of the pandemic, there remain big problems in other parts of the economy and market.
And while we have talked about a whole alphabet soup of stock market patterns - Vs, Ws, Zs and even swooshes - a new picture is emerging of a K-shaped market recovery in which the whole market fell together, rallied together for a couple of months and then diverged as investors focused on the winners and losers from the new economic landscape.
Only three sectors have outperformed the S&P500 index so far this year. Tech stocks are up 27% year to date, while consumer discretionary shares are 23% higher. Banks and energy stocks have underperformed, meanwhile, on the back of rock bottom interest rates and a weak oil price respectively.
But even these sector level distinctions are less helpful than they have been in the past because individual stocks have had such an important influence. Take consumer discretionary, for example. Its strong performance is very largely due to just one stock, Amazon. It accounts for more than 40% of that sector and it has risen by nearly 80% this year.
Just five big tech stocks have played a disproportionate role in the rally. Apple, Amazon, Microsoft, Facebook and Alphabet have accounted for 25% of the total market recovery since March. Largely that’s because they are now so big (22% of the total market value of the S&P 500) that their strong performance offsets the poor performance of literally hundreds of smaller companies.
We talk about the US market doing this, or the FTSE 100 doing that, but the reality is that these indices are only telling half the story. Focusing on the aggregate level of the market can be really misleading when there is such a big divergence between winners and losers.
Here’s another interesting stat. While the S&P 500 ended last week at a new all-time high, every single sector in the US stock market had more decliners than advancers last week. All eleven sectors, including technology.
This is a very unusual state of affairs. In fact, it has only happened four times since 1998 and last week’s 0.8% return for the S&P was the highest return since that year in a week when all eleven sectors declined.
Interesting. But what does it mean for the future performance of the market? Is this a sign of a tech bubble forming that will be resolved by a decline in those high performers and therefore of the market as a whole? Unfortunately, we don’t know because on two of those previous four occasions, the market carried on rising during the next three months. And on the other two it fell. Interesting but not useful.
Another way of looking at the same data is to note that the percentage of companies trading above their 20-day moving average (in other words with momentum on their side) fell last week to 51%. In the summer when lots of new brokerage accounts were being opened up by US workers in receipt of unexpected pandemic stimulus cheques, the figure was 89%.
Without some breadth to the market rally, it is bound to look vulnerable to a change in sentiment. It’s also worth pointing out that smaller companies, as measured by the Russell 2000 index, have fallen back to their trend line. They are running out of steam. Value shares, which typically need a strong economy in order to flourish, have fallen by 13% since the February peak versus an 11% gain for growth shares (including those tech stocks).
One reason for the underperformance of value shares is their overlap with high-dividend paying shares which are experiencing one of the worst barren patches for shareholder distributions in more than a decade. Globally, dividends have suffered their worst quarterly fall since the financial crisis in the three months to June as companies have decided they can’t or won’t maintain their pay-outs in the face of the pandemic.
Total pay-outs fell by a fifth to $382bn, the second lowest quarterly level of payments since 2012 and the worst decline in absolute terms since 2009. Janus Henderson, which tracks dividend data around the world, now predicts a fall in total pay-outs of between 19-25%, although this is an improvement on its recent prediction that dividends could fall by 35% this year. Pay-outs fell in all regions except north America, which was boosted by resilience in Canada. It has been estimated that it will take several years before dividends recover their pre-pandemic levels.
Much will depend on the speed of recovery from the economic heart attack suffered in the second quarter. Here at least there is some encouraging news here in the UK, where economists now expect Britain to experience a record-breaking economic bounce in the July to September quarter. Having been the worst G7 country in the second quarter, it is on track to be the best in the current three-month period.
Total consumer spending, including leisure, during the first two weeks of August was actually higher than in the same period last year. This is the first year on year improvement since March’s lockdown began. GDP growth in the July to September period could be as much as 14.3%, clawing back more than half of the lost output between April and June. The eat out to help out scheme, offering discounts in restaurants during August has helped. Car sales, too, have bounced back, suggesting an appetite for big-ticket items as those lucky enough to have remained in work have found they are spending less on commuting and the other sunk costs of the old way of working.
Britain continues to lag other European countries in terms of the return to work. In part this reflects the dominance of London in the UK economy, which for most people means a dependence on public transport. This is proving a key blocker in the government’s desire to get people back in the office. Many are saying they prefer to stay at home, where remote working has been shown to work for those who do not need face to face contact for their day to day work.
There is very little on the corporate front this week as the holiday season continues. Just a handful of results announcements are expected this week, including numbers from WPP, Rolls Royce and Hays. Meanwhile on the economic front, attention will focus mainly on a virtual Jackson Hole meeting of the world’s main central bankers.
There is plenty to watch out for from this meeting, which always provides an insight into monetary policy, but never more so than during the pandemic which has demanded even greater levels of stimulus than during the financial crisis. The Fed will be looked to for an update on its attitude to unusual measures like capping the yields of government and corporate bonds, so called yield curve control, and also the extent to which the US central bank will allow inflation to exceed previous targets.
The Bank of England might comment on its attitude to imposing negative interest rates, something it has resisted so far but which it says remains part of its potential tool-kit. Meanwhile the European Central Bank might shine some light on the size of its bond buying programme, expected to increase from its current €1.35trn.
In politics, the Republicans are staging their convention this week culminating on Thursday with the nomination of Donald Trump as their candidate in November’s election. The President is expected to appear on all four nights of the largely virtual meeting and yesterday he used a pre-recorded speech to present a picture of a weak Biden White House beholden to socialists and weak on China. He defended his handling of the pandemic and put the blame for it firmly on China.
And finally, another asset class that is attracting concerned speculation about the likelihood of a bubble emerging is commodities. Prices for base metals like copper, nickel and zinc have hit their highest levels in a year and iron ore is now at a six-year high. That has helped drive the FTSE 350 mining index up 61% since March, compared with a rise of just 14% for the FTSE All Share index.
The key question is whether prices have rallied too far too fast on hopes for stimulus in China, the biggest market for commodities, and a consequent rise in its steel output. Commodity prices are also dependent on damage from a second spike in infections being avoided. Evidence on that front looks concerning this week.