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Passed Pawn Advisors July 2020
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Passed Pawn Advisors

A next generation digital investment advice firm utilizing the latest methodology and technology to create sensible and affordable financial solutions for our clients

Quote Of The Month

Never underestimate the power of enthusiastic buyers who do not know what they’re doing.”

-- Jim Cramer, CNBC’s Mad Money host

Economic Highlights

  • The COVID-19 outbreak cases are still on the rise in the US, although the fatality rate has dropped.

  • US GDP fell in Q2 at the annualized rate of -32.9%, the worst on record.

  • Economic activity indicates different recovery rates across industries: housing has recovered well, while travel has recovered little.  Labor market is recovering slowly, and unemployment remains in double digits.

  • The Congress is discussing more stimulus, President Trump signed a limited extension for the unemployment benefits, and the Fed remains extremely accommodative.

  • The 2020 Election is about to enter a final stretch, and national and geopolitical risks to the markets abound.
     

Market Highlights

  • US Equities completed their recovery from March lows, with S&P 500 Index closing higher by another 5.6%, after a relatively slow month of June, up 2.0%, and now turned positive on the year.

  • Foreign equities also rallied, with Developed Markets up by 5.1%, and Emerging Markets led all equities for the second month in row, with a quiet but powerful rally of 8.9%.

  • US high-grade bonds added 1.5%, while high yield jumped 4.7%, but foreign bond went on a tear, with high grade and high yield posting 7.1% and 6.7% gains, respectively.

  • Commodities continued their rally, up 5.7%, with oil still managing gains, up 2.5%.  Gold, however, added another 10.9%, to break the all-time high above $2,000 per ounce.

  • US Dollar was the only major asset in the red for the month again, down -4.2%.


 

Observations and Expectations

July has seen a continued recovery in US and global equities markets, as well as in commodities and in bonds at the same time.  While the economy is struggling to reopen, the markets are willing to look past all that and remain optimistic.  A part of it has been due to what the analysts see as robust Q2 earnings season, which is a very relative term.  More on this in our Question of the Month.

Looking forward to August, we expect a traditionally slow part of the year for the markets before the usually busy and volatile Fall.  It is also time to remember that we’re in an election year, in fact, only 3 months away from it.  Economic conditions are always a big factor in elections, and we expect more politically motivated economic actions (or inactions) in the coming months.  The entire bag of potential market risks remains unmitigated, and the market is running out of good news to feed off in the short term.  Treasuries and bonds sport record low yields and provide limited protection at this point, and even gold is beginning to look expensive at all-time highs.  In other words, there may be few places to turn to for protection in the next market correction.  Yet, some opportunities remain attractive nevertheless, albeit much harder to find.

 

Sector Update

Healthcare is perhaps a surprising choice to be in a bearish camp.  After all, market headlines are full of news about COVID-19 vaccine and cure in the making.  While a few of those biotechs may end up with a big windfall from a success in that area (and they will be under enormous scrutiny when it comes to the pricing and profitability), the other dozens of companies in the hunt will end up big losers.  What’s worse, other areas in biotech and pharma have suffered with their research in the age of social distancing.  Healthcare providers, by and large, have also seen lower profits or losses.  This sector remains highly fragmented, even more than usual, where careful research should guide investors to individual picks only.

Industrials are perhaps not your first guess about which S&P sector had the best performance in the last month or in the last 3 months.  Yet, it is.  Perhaps it’s a function of a strong rebound off the pandemic lows, as the sector is still down on the year.  Even the airlines and other transports that still have ways to go in recovery have booked decent gains in recent months.  The next few months when schools restart and people re-evaluate Holiday travels, will be critical for those industries and the sector as a whole.

Market Data

Want to see a market snapshot and all your favorite stocks in one place? Try our market data pages.

Question of the Month


This is where we answer the best investment question we’ve heard all month. If you’d like your question to be considered, please send it to us.

Question

What are the US corporate earnings telling us about the state of the economy and the market?

Answer

This is an unusual quarter, to say the least.  And while the range of earnings is wide across industries and companies, one usual rule remains firm.  It’s not all about the numbers, and when it comes to numbers – it’s not all about absolute figures.  It’s all relative.

Let me explain.  The quarterly earnings are typically the most important data checkpoint for public US equities, where the required disclosures give a glimpse into how a company is doing.  The management’s commentary and Q&A with analysts further shed light on the company and its prospects.  This is what sets expectations for the next quarterly period and the rest of the fiscal year, which the analysts may also adjust.  Come time of the next report, the absolute results don’t matter as much as how they compare with the expectations and what to expect in the future.

The results of Q2 were feared by many, including yours truly, to establish a troublesome trend in companies and industries that suffered greatly from the economy lockdown.  Yet, apparently the expectations have been lowered to the floor in some cases, and lack of revenue and even some bankruptcies were just par for the course.  On the other end of the spectrum, many companies, mostly in technology sector, have greatly surpassed the expectations.  This resulted in the overall perception that companies have done better than expected, on average.  On top of that, the latter group of companies would have investors believe that the improved results are a longer-term trend, rather than a one-off.  In some cases, it could indeed be justified.  The former group of companies that saw little revenue couldn’t have a future outlook worse than it was in Q2 and therefore is looking undeniably up.

This is a paradox of today’s stock market, where both growth and value seem to look like bargains, yet few stocks are at these levels.  To paraphrase the great Warren Buffett, investors who were buying when blood was in the streets, would also do well by selling now, when everyone else appears to be greedy.

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The materials presented above serve informational purpose only and do not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. The author, Passed Pawn Advisors, LLC, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment assets mentioned above. Motif Investing portfolios that may be presented are created by Passed Pawn Advisors, LLC, and are available for purchase through their site.
 
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