Craig Birk, Chief Investment Officer at Personal Capital, gives his monthly market recap and analysis.
Markets Continue Rise Despite Increasing Coronavirus Cases
Plunging GDP and accelerating COVID-19 infections failed to slow momentum in stocks in July even as several states paused re-opening measures and many schools announced they will not be starting in person. A mild resurgence in countries that peaked in early spring, such as Italy and Spain, as well as a rapid acceleration in Japan, were disheartening. Meanwhile, developments toward a potential vaccine continue to be largely encouraging.
Earnings Beat Expectations
As the pandemic carries on, companies continue to adapt. While earnings are down, they are exceeding diminished expectations. With 63% of the S&P 500 reporting as of the end of July, 84% reported a positive earnings surprise, according to FactSet. This would be the highest proportion since at least 2008.
The very biggest stocks continue to support headline index returns, with investor enthusiasm for Apple, Amazon and Microsoft continuing to grow. The three companies account for all gains in US stocks this year, with the average company in the S&P 500 still down over 6% and small cap stocks down over 10% for the year. All three now trade at a multiple of sales at least 75% higher than their average for the last ten years.
Things to Consider
Most investors understand piling into the hot part of the market after a large rally has historically proven dangerous and often counterproductive. Even so, many
are unable to resist the temptation of high momentum technology stocks, regardless of price. In a pandemic world featuring heightened uncertainty, we believe the risks of concentrated portfolios are the highest in twenty years.
The biggest opportunities for a diversified approach arise when some parts of the market become adored while others are ignored and become cheaper.
