Tech Market Reboots - Adviser Investments

Tech Market Reboots

September 8, 2020

Please note: This update was prepared on Friday, September 4, 2020, before the market’s close.

As they have for most of the year, big tech stocks led a bullish stampede early in the week, but traders hit their “restart” buttons on Thursday and Friday. Tech’s Thursday tumble drove the Dow Jones Industrial Average down 2.8% while the S&P 500 index skidded 3.5% and the tech-heavy NASDAQ Composite fell 5.0%—a taste of downside volatility that was only a matter of time in coming. For those who’ve been wondering why we shouldn’t simply load up on tech and go home, well, the two-day swoon gave a taste of why we believe diversification has value.

A moment of clarity on tech stocks’ overweight in the S&P 500 index (they are 28% of the index, double the next largest sector) and the sustainability of their sky-high valuations is evident in the numbers. Apple’s market value slid by nearly $180 billion on Thursday alone—more than the total individual value of 470 of the 500 companies in the index, making obvious the fact that it is a behemoth with few peers. (Apple’s market value remained over $2 trillion at Thursday’s end.)

So what was behind the dip? Apart from taking profits on tech’s run-up, traders also may have been responding to some economic data that looked good on the surface but masked less optimistic signs (more on this below).

Through Thursday, the Dow Jones Industrial Average has returned 0.8% for the year, while the broader S&P 500 index has gained 8.4%. The MSCI EAFE index, a measure of developed international stock markets, is down 5.1%. As of Thursday, Bloomberg Barclays U.S. Aggregate Bond index’s yield stood at 1.09%, down from 1.20% last week and 2.31% at year-end. On a total return basis, the U.S. bond market has gained 7.4% for the year.

Behind Headline Recoveries, Jobs Pain Lingers

Improving jobs numbers have been bright spots in the economic headlines. This morning’s figures from the Labor Department show U.S. employers added 1.4 million jobs in August, while the unemployment rate fell to 8.4% from July’s 10.2%. Earlier in the week, reports showed that the number of people filing for first-time unemployment benefits declined from over 1 million to 881,000. And payroll-processor ADP’s August private sector jobs report showed job creation more than doubled from July to August, with 428,000 new hires.

All those jobs numbers are headed in the right direction, but we’ve taken a deeper look and see some reasons for concern.

For one thing, when it comes to ADP’s report, Wall Street analysts were looking for a number north of one million, so 428,000 new hires being added to payrolls was a miss rather than a hit. A second factor: The Department of Labor recently changed the way they seasonally adjust weekly jobless claims—meaning that comparing last week’s numbers with this week’s is an apples-and-oranges exercise. Economists said that under the old methodology the numbers would have been worse.

Something similar is happening with the monthly unemployment report. The Bureau of Labor Statistics (the branch of the Labor Department that calculates the unemployment rate) changed some of its classification criteria at the same time that fewer businesses are responding to the surveys they use to do the employment math. Add it all up and the numbers become a little more suspect.

Other, more concrete figures were troubling: Congress’ Pandemic Unemployment Assistance (PUA) program, created in March to provide federal jobless benefits to a range of people who wouldn’t have qualified for them under standard state guidelines (contract and gig-economy workers, for example), saw an uptick in demand. This week’s report showed PUA claims are still rising—up by 152,000, which more than offset the 130,000 drop in state jobless claims.

Overall, 29 million people were still receiving unemployment as of mid-August, and the U.S. had about 11.5 million fewer jobs than in February, the month before the coronavirus hit the U.S. economy. In other words, we still have a long way to go before climbing out of the economic crater created by the pandemic.

Manufacturing Gains Look Solid

If the jobs numbers are secretly shaky, one piece of economic data looks undeniably solid: Manufacturing is in full recovery. Commerce Department figures for July showed spending on goods has recovered from its pandemic-related declines, rising to 6.1% above its February level. And new numbers from the Institute for Supply Management (ISM) released this week showed that manufacturing continued its rebound from its April low. At the same time, the ISM’s data on the service side of the U.S. economy, representing more than two-thirds of all economic activity, slowed dramatically. 

Podcast: How Apple’s and Tesla’s Stock Splits Are Driving Markets

As noted above, the stock market’s been breaking records in recent weeks, led by a handful of high-flying tech stocks. In this week’s The Adviser You Can Talk To Podcast, Equity Research Analyst Kate Austin and Vice President Steve Johnson discuss how Apple’s and Tesla’s recent decision to split their shares helped spur the rally, and how the impact of the splits is rippling through the markets, including the venerable Dow Jones Industrial Average. Kate and Steve talked about many aspects of stock splits including:

  • How stock splits work
  • Are splits still necessary now that most investors can purchase fractional shares?
  • The impact of recent splits on the prices of Apple and Tesla
  • …and how they’ve provoked a changing of the guard at the best-known and most widely followed index, the Dow

Please click here to listen to the podcast today!

Financial Planning Focus:

Rent or Buy?

“Should I rent or should I buy?”

Since buying a home is the largest purchase most people will ever make, this is a financial dilemma almost all of us have faced at least once in our lives. Buying is not for everyone—for some, renting may be a better or more affordable choice. Compared to Generation X and baby boomers, homeownership among millennials—those born between 1981 and 1997—is down 8% from similar points in their lives. And two-thirds of millennial homeowners are already expressing some regret about buying their current homes.

It’s not just younger people who are weighing their options. We have conversations all the time with our clients about home ownership, from trading up from a first home to a second home to purchasing a vacation property or downsizing into retirement.

Whatever your stage of life, here are four financial points to consider when deciding whether to rent or buy.

  1. What’s your timeframe? The longer this house will be your home or vacation destination, the more financial sense it makes to buy. If you don’t see yourself keeping a new house for at least three years, it likely won’t appreciate enough to justify the transaction costs of buying and selling.
  2. What’s the true cost of ownership? You have to account for more than just your principal and interest payments on your mortgage; there are property taxes and insurance to consider. Plus, we recommend budgeting around 1% of the home’s total value every year for maintenance. If you’re wondering if you can afford a house, add up the monthly payments for principal, interest, taxes and insurance (and if this is a second home, add in these costs for your first home, too), then divide by your monthly gross income. If your total housing costs are greater than 28% of your income, you may be stretched too thin—renting (or buying a less expensive home) is the safer call.
  3. Will you get tax savings? A mortgage interest deduction is often touted as a reason to buy. But keep in mind: Before tax laws changed in late 2017, homeowners could deduct interest on mortgages worth up to $1,000,000. Now that’s down to $750,000. What’s more, you must itemize your taxes to take advantage of any mortgage interest deductions. Because of those same 2017 tax-law changes, many owners may find they don’t see any benefit because of the increase in the standard deduction to $12,000 for single filers and to $24,000 for spouses filing jointly.
  4. What about opportunity costs? This question is one you may not think to ask yourself, but it’s how financial planners analyze decisions like these: If you invest your down payment in the stock market instead of using it to buy a house, what rate of return could you reasonably expect? Or what if you simply deposit that money in the highest-yielding savings account you can find? Likewise, if you could rent a similar property for less per month than your total monthly costs of ownership, how much would you gain by investing the excess savings every month?

Renting and buying can each be a smart money move—your income and savings, plus your progress toward a safe and secure retirement, are important factors. Click here for a rent-versus-buy calculator you can try on your own.

Of course, whether to rent or buy isn’t just a financial decision. Some people value the flexibility that comes with renting. Others feel more connected to their community or secure when they own their home. We’ve focused on the financial side of renting vs. buying, but don’t discount the emotional aspects of this decision.

Adviser Investments’ Market Takeaways

Calm and clarity have been sorely lacking when it comes to market news recently—that’s why we’ve begun providing Today’s Market Takeaways, short videos in which a member of our investment team analyzes what the market’s telling us.

You can also find two new Market Takeaways videos on our website. Equity Research Analyst Kate Austin spoke about the recent changes in the Dow and Vice President Steve Johnson marked the unofficial end to summer by putting Thursday’s so-called “crash” in perspective.

Looking Ahead

Next week’s holiday-shortened slate is light, but we’ll be keeping an eye out for a report on consumer credit, job openings data and inflation gauges.

As always, you can visit www.adviserinvestments.com 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.


Please note: This update was prepared on Friday, September 4, 2020, before the market’s close.

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