Weekly Recap: COVID-19 Market Edition

Ryan NaumanMarket Strategistryan.nauman@informa.com

For the week ending August 7, 2020

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The S&P 500 finished the week up 2.49% as a better-than-expected jobs report offset lack of progress towards additional fiscal stimulus and continued tensions between the U.S. and China.

The headline economic release for the week was the widely anticipated July jobs report. The U.S. added 1.76 million jobs during the month down from 4.79 new jobs in June. Despite the jobs’ slowdown, the July number beat expectations of 1.68 million. Meanwhile, unemployment fell for the third straight month to 10.2% from 11.1%. Despite three straight months of solid job gains, non-farm payrolls remain well below pre-pandemic levels.

As for Q2 earnings, 89% of S&P 500 companies reported earnings, with 83% of them beating earnings estimates and 64% beating revenue expectations. Furthermore, the current earnings growth for Q2 sits at -33.8%, which would mark the largest year-over-year decline in earnings since Q1 2009 (-35.4%). The combination of poor forecasted earnings and the equity price rally has pushed the forward 12-month P/E ratio for the S&P 500 index up to 22.3, which is well above 5-year and 10-year averages. (Source: Factset)

It has been well documented over the past six months that the economy is not the stock market. Dislocation between economic data and equity performance has never been as wide as it has been during the past six months. The U.S. economy collapsed during the first half of the year which is evidenced by the below data points. Granted, some of these data points have stabilized and shown signs of life, which has provided investors with optimism, however, they are still well below pre-pandemic levels.

Source: MacroBond

Despite poor economic data and the deepest recession in history, the stock market continues to climb higher. The S&P 500 index has returned +4.93% YTD and an eye-popping 46.40% since March 23rd, and remarkably is within shouting distance of its high-water mark. When you peel away the layers you can get a better understanding of why there is such a wide divergence between the economy and the stock market performance. The stock market is not the economy in large part due to the uber-cap tech stocks like Apple, Microsoft, Amazon.com, Facebook, and Alphabet (both share classes) who have beat earnings despite an economic shutdown and recession. It is no surprise that these five stocks are the largest holdings within the S&P 500 index, accounting for over 22% of the index. As you can see in the “chart of the week”, these five uber-cap tech names have outperformed all the remaining S&P 500 constituents by a wide margin over the past five years, particularly YTD. You don’t have to look hard and far when wondering how the S&P 500 has been able to perform as well as it has during this time of unprecedented poor economic data, it all starts and stops at these five names.

Commentary

Data Point Low Point Latest Level Pre-Pandemic Level 10-Yr Average

GDP Growth (quarterly) -32.90% (Q2 2020) -32.90% 2.36 1.28%

Unemployment Rate 14.70% (4/2020) 10.20% 3.50% 6.19%

Continuing Unemployment Claims (Total All Programs)

32 Million 31 Million 2 Million 4.4 Million

Retail Sales Growth (Monthly) -14.70 (4/2020) 7.50% 0.79% 0.35%

ISM Manufacturing PMI 34.5 (12/2008) 54.2 50.9 53.8

ISM Services PMI 37.8 (11/2008) 58.1 55.5 55.6

U of M Consumer Sentiment 51.7 (5/1980) 72.5 101 86.0

Durable Goods Orders Growth (Monthly) -18.77% (8/2014) 7.60% 2% 0.22%

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Sources: Zephyr StyleADVISOR, Macrobond, PSN Enterprise, Bloomberg. 1-week data as of 8/7/20, unless otherwise stated, time periods over 1 week as of 7/31/20. Equity Style Performance represented by: Large Value – Russell 1000 Value, Large Blend – Russell 1000, Large Growth – Russell 1000 Growth, Mid Value – Russell MidCap Value, Mid Blend – Russell MidCap, Mid Growth –Russell MidCap Growth, Small Value – Russell 2000 Value, Small Blend – Russell 2000, Small Growth – Russell 2000 Growth. Fund flow data (EPFR Global) 7/30/20 –8/5/20, S&P 500 (Large Cap Blend flows), Russell 3000 (all U.S. equity flows), Russell 1000 (all Large Cap flows), Russell Mid Cap (all Mid Cap flows), Russell 2000 (all Small Cap flows), MSCI EAFE (Western Europe DM, Asia Pacific DM flows) MSCI EM (All Emerging Market flows), MSCI World (All Developed Markets flows)

Global Asset Class Performance

Index 1 Week 3-Mos YTD 1 Year 3 Year Flows (mil)S&P 500 2.49% 12.87% 2.38% 11.96% 12.01% ($548)

Russell 3000 2.63% 13.87% 2.01% 10.93% 11.39% ($6,539)

Russell 1000 2.43% 13.91% 2.88% 12.03% 12.02% ($4,235)

Russell MidCap 2.05% 15.36% -3.79% 2.04% 7.30% ($184)

Russell 2000 6.03% 13.32% -10.57% -4.59% 2.69% ($1,625)

MSCI EAFE 1.96% 10.55% -8.97% -1.24% 1.12% $590

MSCI EM 1.00% 18.02% -1.52% 6.92% 3.22% ($2,726)

MSCI World 2.25% 12.91% -0.93% 7.82% 8.12% ($4,711)

1 Mos Value Blend GrowthLarge 3.95% 5.86% 7.69%

Mid 4.72% 5.87% 7.99%

Small 2.06% 2.77% 3.44%

YTD Value Blend Growth

Large -12.95% 2.88% 18.26%

Mid -14.22% 3.79% 12.48%

Small -21.92% -10.57% 0.27%

Factor Index 3 Mos YTD 1 YR Risk-Adj %

MSCI USA Small Cap 15.02% -9.18% -1.12%

MSCI USA Value 5.97% -12.95% -5.19%MSCI USA Minimum Volatility 7.92% -2.28% 3.30%

MSCI USA Momentum 18.17% 12.38% 18.51%

MSCI USA Quality 12.08% 6.44% 21.11%

MSCI USA Dividend Tilt 8.29% -4.66% 4.89%

Index 1 Week 3-Mos YTD 1 Year 3 Year YieldBloomberg Barclays US Aggregate 0.10% 2.61% 7.72% 10.12% 5.69% 1.05

Bloomberg Barclays US High Yield 0.56% 10.37% 0.71% 4.14% 4.54% 5.90Bloomberg Barclays Municipals 10 Yr 0.46% 5.79% 4.30% 5.70% 4.67% 0.94

Major Equity Asset Class Performance Equity Style Performance Equity Factor Performance

8/7/20 7/31/20 6/30/20 12/31/19 8/7/19 8/7/172-yr U.S. Treasuries 0.13 0.11 0.16 1.58 1.59 1.3610-yr U.S. Treasuries 0.57 0.55 0.66 1.92 1.71 2.2630-yr U.S. Treasuries 1.23 1.20 1.41 2.39 2.22 2.8410-yr German -0.56 -0.57 -0.50 -0.19 -0.60 0.4810-yr Japan 0.00 0.01 0.03 -0.03 -0.20 0.0710-yr U.K. 0.19 0.14 0.21 0.74 0.49 1.18

Major Fixed Income Asset Class Performance

Rates

Chart of the Week: Uber-Tech Stocks Have Carried The S&P500Zephyr StyleADVISOR Zephyr Associates

5 Largest S&P 500 Constituents (AAPL, MSFT, AMZN, FB, GOOG (combined)) vs All Others (Equally Weighted)July 2015 - June 2020 (not annualized if less than 1 year)

Ret

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-10

0

10

20

30

40

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YTD 1 quarter 1 year 2 years 3 years 4 years 5 years

Top Five Largest StocksAll other S&P ConstituentsS&P 500

COVID-19 Dashboard: The # Of Coronavirus Cases In The U.S. Rises Above 4.5 Million

Source: Macrobond, World Health Organization 4

Source: Macrobond, World Health Organization 5

COVID-19 Dashboard: Market Volatility Has Returned As Cases Have Increased

Source: Macrobond, Centers for Disease Control & Prevention 6

COVID-19 Dashboard: U.S. Cases Climb Higher Driven By Increases In The South & West

7Source: Macrobond, World Health Organization, Citi

COVID-19 Dashboard: Citi Macro Risk Index Has Fallen As COVID-19 Cases Have Increased

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Markets: The Solid Performance Of The S&P 500 Can Be Attributed To Its 5 Largest Holdings

Zephyr StyleADVISOR Zephyr Associates

5 Largest S&P 500 Constituents (AAPL, MSFT, AMZN, FB, GOOG (combined)) vs All Others (Equally Weighted)July 2015 - June 2020 (not annualized if less than 1 year)

Ret

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-10

0

10

20

30

40

50

YTD 1 quarter 1 year 2 years 3 years 4 years 5 years

Top Five Largest StocksAll other S&P ConstituentsS&P 500

Source: Top Five Largest Stocks and All Other S&P Constituents are equally weighted.

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Markets: Despite All The Turmoil, The S&P 500 Is +4.93% YTD

Zephyr StyleADVISOR Zephyr Associates

Thursday, January 2, 2020 - Friday, August 7, 2020 (Single Computation)

65

70

75

80

85

90

95

100

105

110

Jan 01, 2020 Jan 30, 2020 Feb 28, 2020 Mar 27, 2020 Apr 27, 2020 May 26, 2020 Jun 23, 2020 Aug 07, 2020

S&P 500

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Markets: The S&P 500 Is 0.14% Away From Its High-Water Mark

Zephyr StyleADVISOR Zephyr AssociatesThursday, January 2, 2020 - Friday, August 7, 2020

-45%

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%0%

Jan 01, 2020 Jan 31, 2020 Mar 03, 2020 Apr 01, 2020 May 04, 2020 Jun 04, 2020 Jul 06, 2020 Aug 07, 2020

S&P 500MSCI EAFEMSCI EM (EMERGING MARKETS)Gold London PM FixingRussell 2000

Thursday, January 2, 2020 - Friday, August 7, 2020: Summary Statistics

S&P 500

MSCI EAFE

MSCI EM (EMERGING MARKETS)

Gold London PM Fixing

Russell 2000

S&P 500

MaxDrawdown

MaxDrawdownBegin Date

MaxDrawdownEnd Date

MaxDrawdown

Length

Max Drawdown

Recovery DatePainIndex

PainRatio

High WaterMark Date

To HighWater Mark

-33.79% Feb 20, 2020 Mar 23, 2020 23 N/A 9.53% 0.48 Feb 19, 2020 0.14%

-33.86% Jan 21, 2020 Mar 23, 2020 44 N/A 12.38% -0.63 Jan 17, 2020 8.88%

-33.71% Jan 21, 2020 Mar 23, 2020 44 N/A 12.59% -0.12 Jan 17, 2020 3.46%

-12.44% Mar 9, 2020 Mar 19, 2020 9 Apr 14, 2020 1.72% 19.46 Aug 6, 2020 1.77%

-41.72% Jan 17, 2020 Mar 18, 2020 42 N/A 16.16% -0.34 Jan 16, 2020 7.82%

-33.79% Feb 20, 2020 Mar 23, 2020 23 N/A 9.53% 0.48 Feb 19, 2020 0.14%

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Markets: Chinese Equities Are +14% YTD While S&P 500 is +4.93%

Zephyr StyleADVISOR Zephyr Associates

Thursday, January 2, 2020 - Friday, August 7, 2020 (not annualized if less than 1 year)

Return

-30 -20 -10 0 10 20

YTD

MSCI ChinaMSCI SwitzerlandMSCI JapanMSCI KoreaMSCI CanadaMSCI GermanyMSCI AustraliaMSCI United KingdomMSCI RussiaMSCI ItalyMSCI SpainMSCI MexicoMSCI BrazilS&P 500

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Markets: The Technology Sector Continues To Set The Pace For Equities

Zephyr StyleADVISOR Zephyr Associates

Thursday, January 2, 2020 - Friday, August 7, 2020 (not annualized if less than 1 year)

Ret

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-40

-30

-20

-10

0

10

20

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AnalysisPeriod

Dow Jones U.S. TechnologyDow Jones U.S. Consumer ServicesDow Jones U.S. Health CareDow Jones U.S. CompositeDow Jones U.S. Consumer GoodsDow Jones U.S. UtilitiesDow Jones U.S. Basic MaterialsDow Jones U.S. TelecommunicationsDow Jones U.S. IndustrialsDow Jones U.S. FinancialsDow Jones U.S. Oil & GasS&P 500

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Markets: Haven Treasuries Continue to Outperform YTD

Zephyr StyleADVISOR Zephyr Associates

Thursday, January 2, 2020 - Friday, August 7, 2020 (not annualized if less than 1 year)

Ret

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0

2

4

6

8

10

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YTD

Barclays U.S. Treasury: 7-10 YearBarclays U.S. AggregateBarclays U.S. Corporate Investment GradeBarclays U.S. Treasury: 1-3 YearBarclays Municipal BondBarclays Global x US BondBarclays U.S. Corporate High Yield

Source: Macrobond, BEA 14

Economy: Q2 GDP Plummets To Historic Lows, While 10-Yr Quarterly Average Is 1.28%

Source: Macrobond, U.S. Department of Labor, BLS, BEA 15

Economy: Unemployment Claims Climb Above 54 Million Over The Past 19 Weeks, While The Unemployment Rate Falls

Source: Macrobond, U.S. Bureau of Labor Statistics (BLS) 16

Economy: The Unemployment Rate Falls To 10.20%, While The 10-Yr Average Is it 6.18%

Source: Macrobond, U.S. Bureau of Labor Statistics (BLS) 17

Economy: Despite Three Straight Months of Solid Job Gains, Non-Farm Payrolls Remain Well Below Pre-Pandemic Levels

Source: Macrobond, U.S. Department of Labor 18

Economy: Continuing Unemployment Claims Spiked To Historic Levels And Well Above 10-Yr Average

Source: Macrobond, University of Michigan 19

Economy: Consumer Sentiment Falls, While Remaining Well Below 10-Yr Average

Source: Macrobond, U.S. Census Bureau 20

Economy: After Falling To Historic Lows, M-o-M Retail Sales Growth Has Rebounded Above 10-Yr Average

Source: Macrobond, U.S. Census Bureau 21

Economy: After Plummeting To Historic Lows, Durable Goods Orders Have Shown Signs Of Recovery

Source: Macrobond, Institute for Supply Management 22

Economy: After Plummeting, PMI’s Have Rebounded Above 10-Year Averages And Signal Expansion Ahead

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All Eyes On……..

Day Event/Earnings

Monday, August 10

U.S. Job Openings (June)Canopy Growth Corporation, Tilray, Inc., New Age Beverage Corporation

Tuesday, August 11

U.S. NFIB Small-Business Index (July), Producer Price Index (July)JD.Com, Canada Goose Holdings Inc., Sysco Corporation

Wednesday, August 12

U.S. Consumer Price Index (July), Federal Budget (July)Cisco Systems, Inc., Macys, Inc.

Thursday, August 13

U.S. Initial Jobless Claims (Aug. 8)Applied Materials, Inc.

Friday, August 14

U.S. Retail Sales (July), Industrial Production (July), Consumer Sentiment Index (August)Draftkings Inc.

The second quarter earnings cycle is coming to a close with 89% of the S&P 500 constituents on the board for announcing their earnings, while the week ahead includes names like Cisco, Macys, and Applied Materials.

As for economic data, sentiment for consumers and small-businesses will be widely watched as uncertainty regarding the pandemic continues, however, the headline releases will be inflation and retail sales. Retail sales have mounted a strong comeback after an epic collapse during the pandemic shutdown, however, will the comeback continue or will it slow as the number of coronavirus cases continued to climb higher July.

About Ryan Nauman

As Market Strategist, Ryan Nauman’s primary focus is providing value added market and investment insight along with educating buy-side participants on investment analytics and portfolio management concepts.

Ryan provides analysis and research on market trends across asset classes, sectors, and regions to help empower better decisions for creating asset allocation strategies. His insight is disseminated through white papers, articles, training, and interviews with a target audience of financial advisors, portfolio managers, and investment analysts.

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