The S&P Creeps Closer to a Record - Adviser Investments

The S&P Creeps Closer to a Record

Please note: This update was prepared on Friday, August 14, 2020, before the market’s close.

Is the recession over? It depends who you ask. While some U.S. consumers were barely affected by the recession that officially began in March, others are still feeling its profound impact. And it could get worse, particularly for those who have lost jobs and fear that with September rents looming and a deadlocked Congress putting any new pandemic relief on ice, trouble is just weeks away.

On the surface, it might seem that a U.S. economic recovery is underway. New unemployment claims fell below 1 million last week, the lowest number since the pandemic began to take its toll in March. The number of people collecting jobless benefits decreased to roughly 15.5 million from 16.1 million in the prior week. While these are improvements, fewer than half the jobs lost since the spring have been recovered. Meanwhile, the Centers for Disease Control issued a dire warning about the potential death toll from COVID-19 as we move into the forthcoming flu season.

So, it seems counterintuitive that stocks have been rallying. The S&P 500 has returned roughly 50% since March 23 when U.S. stocks bottomed out, buoying Wall Street’s expectations that the index would imminently hit an all-time high. It missed by just 0.17% on Wednesday.

Through Thursday, the Dow Jones Industrial Average was down 0.8% on the year, while the broader S&P 500 has returned 5.7%. The MSCI EAFE index, a measure of developed international stock markets, is down 6.1%. As of Thursday, Bloomberg Barclays U.S. Aggregate Bond index’s yield stood at 1.16%, down from 2.31% at year-end. On a total return basis, the U.S. bond market has gained 6.9% for the year.

The Bear Market Is Over…Technically

Wall Street and the media have a funny way of reporting on stock market returns, ignoring a critical component—dividends. But, as we like to say at Adviser Investments, “dividends matter.” In fact, if you count dividends, as we do, then the bear market that saw the S&P 500 hit a 33.9% decline from its peak in mid-March is over. As of Thursday night, the S&P 500 index was 0.4% below its record high reached on February 19. If we include dividends, the S&P hit its 14th and 15th record closes in 2020 this week.

Source: S&P Dow Jones Indices. Note: “S&P 500 Index TR” reflects the total return of the S&P 500 index with dividends included. The chart shows performance from 2/19/20 to 8/13/2020.

But just because the market had recouped its losses from earlier this year doesn’t mean we predict smooth sailing ahead. With just 81 days until the November elections, the political mudslinging is ramping up. As investment advisers, we think it’s policy, not politics, that matters. To that end, we believe that putting our economy back on firm footing depends largely on controlling and containing the spread of COVID-19, particularly as flu season approaches. We remain alert to the fact that both the economic and market recoveries could quickly reverse course.

Trendy Investments Are Long-Term Losers

Despite the pandemic’s impact on our economy, in the stock market, the big continue to grow bigger.

Five mega-stocks—Facebook, Apple, Amazon, Google and Microsoft—have returned between 13% and 70% this year and now make up more than 20% of the market capitalization (or size) of the S&P 500 and 40% of the NASDAQ Composite index.

Is it time to throw in the towel on diversification and double down on a handful of high-growth tech titans? Definitely not. In our estimation, the trend-chasing that leads to outsized investment returns over the short-haul seldom pays off for long-term investors.

Market history is full of examples of outsized returns concentrated among a few hot companies or sectors that tempt investors—only to disappoint them in the end.

Given tech stocks’ singular performance recently, it is easy for investors to draw a precarious parallel to their legendary surge in the late 1990s and 2000, which, as we know, ended in ostentatious demise. It only takes three words to send a little shiver up investors’ spines: Pets-dot-com.

After the tech bubble burst, investors searching for growth piled into shares of companies located in the “BRIC” countries—Brazil, Russia, India and China. That worked for a while, until it didn’t. U.S. stocks have outpaced emerging markets’ stocks by more than 4-to-1 over the last decade. (We’d insert a joke here about stocks falling like a BRIC, but we think it’s self-evident.)

Perhaps the closest comparison to today’s concentrated market leadership goes back to the so-called “Nifty 50” of the 1960s and 1970s. These were 50 “sure thing” stocks that traded up to lofty valuations. The thinking was that the likes of McDonald’s, IBM, Polaroid, Coca-Cola, Eastman Kodak and others were so stalwart and reliable that you could buy them at any price, hold on forever and they’d make you rich. Many of the Nifty 50 blew up, but only after investors of all stripes piled into them.

It’s not only high-growth equities that have attracted trend-chasers. Gold has also been on an amazing tear over the past few weeks, with many investors worried that massive government spending will generate massive inflation. But so far that hasn’t happened—just as it didn’t happen after the huge government outlays during the Financial Crisis.

That isn’t to say inflation can’t ever come back, but even with the Consumer Price Index’s recent 0.6% increase last month, inflation by that measure is only up 1% over the last year. Gold advocates contend that with interest rates so low, the old notion that gold is a lousy investment because it never pays a yield is just irrelevant now. Those arguments might have seemed compelling…until this week, when yields began rising and gold’s price began falling.

There’s a phrase that sums up all this trend-chasing—recency bias. Investors will see what’s been profitable lately and conclude the trend will continue well into the future. It’s taken hold with the big tech stocks, it was on a tear with gold until a couple of days ago and it’s also beginning to see some life among value stocks in recent days.

Our advice is to avoid trends, remain diversified and invest with managers who know how to spot opportunities, no matter their labels or recent performance. Let the noise pass you by.

Podcast: Investment Trends Are Fleeting—Defending Against Recency Bias

For more on recency bias, join Chairman Dan Wiener and Director of Research Jeff DeMaso for an insightful look at the dangers of peoples’ tendency to expect the future to look like the recent past—and how disciplined investors can defend against this all-too-human impulse.

In this informative conversation, Dan and Jeff discuss:

  • Is the 10-year Treasury still a benchmark economic barometer?
  • Why pundits are premature in counting out the “60/40” portfolio
  • What’s the argument for investing in gold? And why you might want to think twice before going all in
  • The potential impact of a vaccine on sectors hard-hit by the pandemic
  • …and much more

Investment trends can seem like no-brainers…until they’re not. How can you identify opportunities, guard against biases and defend against shifting tides? It’s never too soon to be a more informed investor. Click here to listen now!


Financial Planning Focus:

Financial Planning in Your 20s

Is youth really wasted on the young? Not necessarily. Our twenties are a time of great opportunity—starting a career, advancing in education, living on our own, perhaps meeting a life partner. This is when many of us establish the financial and investment habits that create a solid foundation for the rest of our lives.

Here are five best practices you can follow yourself if you’re in the cohort, or pass along to your Gen-Y children, grandchildren or other young loved ones to help set them on a course for financial success now and in the future:

  1. Invest Early and Often. When you start earning a paycheck, strive to put away at least 10% of your pre-tax income for retirement. This sounds like a lot, but keep in mind that this 10% includes any matching funds you receive from your employer through, say, a 401(k) plan. Tap into the power of compounding by investing early and often and allowing the market to work for you.
  2. Invest for the Long Haul. You can weather greater risk with youth on your side; there’s more time to recover from—and capitalize on—inevitable market downturns. You won’t be touching your retirement accounts for decades, so make stocks or stock funds a major component of your portfolio.
  3. Create an Emergency Fund. Can you afford to continue paying your monthly bills if you lose your job unexpectedly? The rule of thumb is to set aside six months of household living expenses to cover you in a crisis. (Our Budget Worksheet can help you plan ahead.)
  4. Build Your Credit. Your credit score reflects your financial health and it has an impact on how much you’ll pay for big expenses down the road: Interest rates on home and car loans and insurance premiums are often based, in part, on your credit history. Potential employers may also check your credit history to get a read on your financial stability. Review your credit score and credit reports on a regular basis. We recommend adding at least one credit-monitoring app to your phone—Credit Karma, Mint and Credit Sesame each monitor your credit score and provide tips on improving it.
  5. Maximize Company Benefits. Your employer may provide a match on your 401(k) contributions or offer benefits. Take advantage of savings wherever you can get them, including health savings accounts, life and disability insurance, and other perks like discounts on gym memberships or continuing education. Check with your company’s human resources department to make sure you are aware of all benefits available to you.

If you have questions about these tips for twentysomethings or any other financial planning or investment topics, please contact your wealth management team. We are always happy to help.


Adviser Investments’ Market Takeaways

This week, Chief Investment Officer Jim Lowell appeared on Bloomberg Radio to discuss rising U.S.-China tensions.

You can also find two new Market Takeaways videos on our website. Equity Research Analyst Kate Austin talked about how earnings didn’t fulfill our worst fears and Vice President Steve Johnson discussed Apple’s and Tesla’s recent stock splits, among other topics.

Looking Ahead

Next week’s slate includes a bevy of reports on the state of the housing market, as well manufacturing and service sector indexes, and leading economic indicators from the Federal Reserve. We’ll also be keeping an eye on the weekly employment numbers and the latest epidemiological data.

As always, you can visit for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.

About Adviser Investments

Adviser is a full-service wealth management firm, offering investment managementfinancial and tax planningmanaged individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994. Adviser Investments and its subsidiaries have over 5,000 clients across the country and over $8 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, and we’re experts on Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To. To see a full list of our awards and recognitions, click here, and for more information, please visit or call 800-492-6868.

Please note: This update was prepared on Friday, August 14, 2020, before the market’s close.

This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.

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