Weekly COVID-19 Pandemic Market Recovery Update

Hi Friends!

Hope your week is going well.

Stock Market

The week of August 10th was another positive week for the market. The market is continuing its steady upward rise. “The stock market had another good week, with the S&P 500 index finishing up 0.6% to 3372.85; the Dow Jones Industrial Average rising 497.54 points, or 1.8%, to 27,931.02; and the Nasdaq Composite gaining 0.1%. The S&P 500’s gain was good enough for the index to finish the week within 0.4 percentage point of its Feb. 19 record high.” Levisohn, Ben. “The Bear Market Is Nearing an End. The Bubble Might Just Be Getting Started.” Barron’s. August 15, 2020. And the market likely has much more room to move upward.

Trying to time the market rarely works. Staying invested allows you to realize the market’s best gains, which can follow closely on the heels of the days of big market drops. “Last week witnessed the 100th trading day since the stock market’s pandemic low on Mar 23.The S&P 500 logged a record close of 3,386.15 on Feb 19, then dropped by 33.9% to its Mar 23 close of 2,237.40, as corona virus induced lock-down stalled the global economy. During that stretch, the S&P 500 broke its longest bull run and entered the bear market. However, the S&P 500 is now about 50% above its Mar 23 close. This marks the U.S. stock-market benchmark’s biggest 100-trading-day ascent since the period ending Aug 18, 1933.” Wall Street’s Best 100 Days Since 1933: ETF Winners.” Zacks, Sanghamitra Saha. Yahoo Finance. August 17, 2020. These past 100 days have been extraordinary. You don’t want to miss out on investment gains like those. Please see the attached report showing the effect of missing the market’s best days on a portfolio’s overall return.

Strong economic data, improving jobs numbers, low interest rates, a strong housing market, and the confident consumer are all strong indicators the market isn’t done going up for the year. “The technical setup for stocks remains constructive, as record highs loom just overhead. Broadening market breadth and bullish momentum are confirming the advance. The fundamental outlook is also improving, as the economy reopens against a backdrop of decelerating corona-virus cases and continued progress toward a timely vaccine. While valuations are lofty, we believe they are supported by record-low yields, along with unprecedented fiscal and monetary policy. We reiterate our year-end price objective on the S&P 500 index of 3,600.” Sandler, Piper. “Inflation, Economic Recovery, and Tesla Stock.” Barron’s. August 14, 2020. On Tuesday, August 18th, the S&P 500 had a record close since February, erasing its year to date loss.***

The rotation in growth from large cap stocks to small cap stocks has begun. No longer is it just large cap stocks that are gaining. “Small-caps have been on a roll lately: The Russell 2000 has climbed 7% over the past two weeks. That has begun to narrow the performance gap with the large-cap indexes in 2020, but small-caps still have under-performed by single digits.Large-cap estimates have climbed, as well, but not nearly as much as small-caps’ have. The S&P 500 index EPS consensus estimate for 2020 has risen about 4% in the same period. “We see this creating a really nice tailwind for these stocks, and one that will last a while,” writes DeSanctis.” Jasinkski, Nicholas. “Small Cap Stocks Have the Wind at Their Back.” Barron’s. August 14, 2020. I have several favorite small cap growth funds. Please let me know if you would like some recommendations.

This is a good time to add some exposure to small cap stocks to your portfolio. “Small-cap [stocks] have historically outpaced large-caps coming out of bear markets, especially during economic rebounds. Second, we also expect cyclical stocks to outpace defensives in a re-energized global economy, as they’ve done historically—and small-caps are typically more cyclically sensitive than large-caps.” Royce, Chuck and Francis Gannon. “Reconciling a Robust Market and a Weak Economy.” Royce Investment Partners. July 8, 2020. Small cap stocks have the potential for greater upside than large cap stocks, but they also tend to be more volatile. So, it’s important to take the volatility into consideration when you’re determining the percentage allocation of small caps to your portfolio.

Large cap retail stocks are performing well. Amazon, Wal-Mart, and Target are at or near record highs. “Target Corp. reported a record-setting second-quarter early Wednesday, with profits and comparable sales bolstered by market share gains and customer service options across digital platforms that drove shoppers to stores…Comparable sales soared a record 24.3%, with digital comparable sales nearly tripling, up 195%, and comparable-store sales up 10.9%. The retailer added 10 million new digital customers in the first half of the year.” Garcia, Tonya. “Target reports record setting quarterly profits and comparable sales, $5 billion in market share gains for first half of 2020.” MarketWatch. August 19, 2020. Consumers are actively shopping online and in person. Demand remains strong. Consumers have increased levels of savings from sheltering in place that will be deployed into the economy when consumers have an increased feeling of safety.

We don’t need to get hung up on the current higher price to earnings stock multiples that many companies’ stock prices currently have. “The S&P 500 recently traded at 26 times this year’s depressed earnings, or 21 times last year’s earnings, versus an average historical level of closer to 15 times earnings. Get used to it, Golub says. “For the next decade, we’re going to live with stock multiples in the mid-20s, even though that seems historically very high, and that is going to be really uncomfortable for professional investors.” Hough, Jack. “The Economy May be Struggling, but the Pet Business and the Stock Market Keep Running Strong.” Barron’s. August 14, 2020. Our low interest rates, slow but steady growth, and easy money policy being utilized by the Fed allows for those higher price to earnings multiples.

Stay invested regardless of what’s going on in the market. Don’t try to time the market on when to invest. Consider dollar cost averaging into the market, so you’re buying more shares when prices are lower and fewer shares when prices are higher, lowering your cost basis. “In spite of the 10-year-plus bull market—that people stay invested in equities. The risk of being out of the market outweighs the risk of staying in the market. It’s very expensive to be out of markets, especially if you’re a U.S. taxpayer. Getting out means you have to pay tax and then figure out the time to get back into the market.” English, Carleton. “Goldman Casts a Wider Net.” Barron’s. August 17, 2020. It’s virtually impossible to be perfect in timing the market knowing when to get in and out. By staying invested in the market you can capture the market’s best performing days.

Economy

Retail sales numbers for July missed expectations but are nevertheless robust. “US retail sales rose 1.2 percent from a month earlier in July 2020, easing from an upwardly revised 8.4 percent growth in June and missing market expectations of 1.9 percent advance. The latest reading suggested that a resurgence in COVID-19 infections and a reduction in unemployment benefit checks likely weighed on domestic demand. There were increases in sales at electronics & appliance stores (22.9 percent vs 37.6 percent in June), gasoline stations (6.2 percent vs 14.8 percent), miscellaneous store retailers (6.2 percent vs 21.7 percent), restaurants & bars (5.0 percent vs 26.7 percent), and health & personal care stores (3.6 percent vs 6.9 percent). At the same time, declines were seen in trade at motor vehicle & parts dealers (-1.2 percent vs 9.1 percent), building materials stores (-2.9 percent vs 0.8 percent) and sporting goods, hobby, musical instrument, & book stores (-5.0 percent vs 27.6 percent).” “US Retail Sales.” Trading Economics. August 14, 2020. The numbers are particularly impressive considering we’re still in the midst of a pandemic.

July sales were strong. August and September’s back to school sales are not likely to be as robust as previous years since not all schools have in person classes. “July sales rose a solid 1.2% from a month ago, but, more surprisingly, are now 1.7% higher than they were in February. The numbers are particularly impressive considering that Covid hit parts of the Sunbelt especially hard last month and that fiscal support from Washington has slowly been running out, writes Jefferies economist Aneta Markowska.” Levisohn, Ben. “Target and Walmart Both Report Earnings This Coming Week. Only One is Likely to Bust Out.” Barron’s. August 14, 2020. Back to school shopping is second only to Christmas. As more schools reopen, the total sales impact of back to school shopping sales totals could simply be delayed and not lost.

Consumers are starting to loosen their purse strings. US savings rates were at an all time high with consumers stuck at home sheltering in place. Consumers are venturing out more, but e-commerce continues to be a preferred way to shop during the pandemic for ease and safety reasons. “Currently, we see an e-commerce volume surge, nascent price improvement, new industry leadership, and the optionality of an urgent vaccine trade all coming together to provide a potentially sharp positive tailwind for FedEx and UPS. We admittedly missed UPS, but firmly believe that FedEx has meaningful upside.” Citi. “FedEx.” Research Reports: Barron’s. August 17, 2020. FedEx and UPS are capitalizing on the increased shipping needs of consumers. There are also investments that focus on the e-commerce revolution. Please let me know if you would like some recommendations.

Housing Boom

Existing home sales data is released on Friday, August 21st. US existing home sales rose the most on record in June 2020. “As Americans impacted by stay-at-home orders sat idle in their houses, many began “painting, building, fixing and decorating,” The Wall Street Journal writes. The result? A veritable stampede at stores like Home Depot, where daily foot traffic has soared by at least 35% since April. It has led to the contradiction of a nation grappling with a debilitating economic crisis that cost tens of millions of workers their jobs, while at the same time embracing a decadent home remodeling boom. Companies specializing in swimming pools, outdoor living, and home renovations are also booming.” Murfett, Andrew. “You say recession, I say remodel.” LinkedIn News. August 18, 2020. Mortgage rates are at almost lows, so it remains a great time to refinance, buy a home, car, second home, etc. Please let me know if you would like a recommendation for a mortgage broker, realtor, title company, car leasing company, etc.

Home Depot, Lowe’s, Sherwin Williams, etc. have performed well during the pandemic. Consumers are still spending money improving their homes. "Nesting" is a very natural consequence of the lock-downs and pandemic mitigation strategies implemented by those states and municipalities that have taken this virus seriously. Additionally, those households that have not suffered any job losses have continued to earn income while cutting back dramatically on expenses they would normally have incurred over the past seven-and-a-half months: Dining out, retail therapy, and extravagant family vacations have all been delayed, deferred or canceled outright. Finally, the unknown of what the future holds, including the possibility that WFH will become a permanent aspect of the hashtag#FutureOfWork, create an imperative for idealizing what a home can or should be.” Smirniotopoulos, Peter. “Nesting.” LinkedIn News. August 18, 2020. So, while consumers may be delaying other big purchases and growing their savings, they are busy improving their homes inside and out.

We are not in a housing bubble. The housing market has much more room to grow. Demand is stronger than the existing supply of homes, causing a bidding war in many cases. “Simply looking at the demand for housing [doesn’t show] the entire picture. After all, the housing market is still well below 2005-06 levels. Enter the remodeling side of the equation. More home renovations and more home buying are combining to drive lumber prices higher.” Avalon Investment & Advisory. “Tough to Evaluate.” Barron’s. August 12, 2020. Higher lumber prices could make homes more expensive and slow the addition of new houses to the national housing supply. This is a great time to buy a house, vacation home, or investment property.

Apple

Apple and Tesla both recently announced stock splits. The stock splits effectively lower the share price, which will make Apple and Tesla stock more affordable to the average investor. “After Apple and Tesla recently announced stock splits, shares of each promptly rallied some 20%. Given those big gains, investors can expect more companies with high-priced stocks to follow suit…Fans of splits argue that they can expand a stock’s ownership base; it’s easier for the small fry to buy lower-priced shares. The more people who are in the game, the more chance that demand for the shares will stay robust, making it likely that the price of the split shares will go up. In addition, a split often signals that management feels confident about a company’s future, adding allure to its shares.” Root, Al. “Apple, Tesla Stock Splits Could Encourage Others.” Barron’s. August 14, 2020. Stock splits are rarely viewed negatively. Tesla announced a five for one stock split, and Apple announced a four for one stock split. Apple will split its shares on August 31st. Tesla will split its shares on August 21st.

Apple reached another record this week. Its market valuation is now $2 trillion. Apple continues to outperform during the pandemic. “Apple Inc.’s market capitalization climbed into $2 trillion territory Wednesday, establishing yet another valuation milestone just two years after becoming the first U.S. company to top $1 trillion. Apple first closed above a $1 trillion valuation on Aug. 2, 2018, 38 years after the company went public. After falling back below the mark for one day on March 23, amid concerns that the COVID-19 crisis would pressure its business, Apple was able to more than double its market capitalization in less than five months.” Bary, Emily. “Apple hits $2 trillion market cap in intraday trading, establishing yet another milestone.” MarketWatch. August 19, 2020. Apple has a very diversified source of revenue from smartphones, computers, tablets, wearables and accessories, and services.

TikTok

An increasing number of firms are considering purchasing TikTok’s US assets. But Microsoft is most likely to finalize a deal. Microsoft is expected to finalize a deal but Oracle has also expressed interest. “Outside of Apple there’s no other R&D team in the U.S. that rivals Microsoft and what’s under the hood in Redmond. I don’t have any concerns about lines of codes that need to be cleansed and converted from Chinese ownership. That’s a task Microsoft is well up to,” said Ives, who believes the final price for TikTok would be "somewhere between $25 billion and $40 billion dollars," although Reuters reports Bytedance investors say it could go as high as $50 billion.” Claman, Liz. “Negotiations to sell TikTok’s US assets to Microsoft in top of the 7th inning.” Fox Business. August 19, 2020. A deal is expected to be finalized between Microsoft and ByteDance parent to TikTok by September 15th.

COVID-19 Vaccine

Russia has developed a COVID-19 first but without a verifiable protocol of data and testing to back up its viability. Germany has been one of the first countries to question the efficacy of Russia’s vaccine. “Germany on Tuesday raised doubts over the quality and safety of Russia's corona virus vaccine, stressing that drug approval is granted in the European Union only after full clinical trials. "Patient safety is of the highest priority," a health ministry spokeswoman told German newspaper network RND. "There is no known data on the quality, efficacy and safety of the Russian vaccine." Agence France Presse. “Germany Questions Quality, Safety of Russian Vaccine.” Barron’s. August 11, 2020. Before the pandemic is over it is possible that dozens of different vaccines and treatments will be created.

Merck hasn’t had the tremendous share price appreciation that many of the other companies have experienced who are developing a COVID-19 vaccine. Merck is Barron’s stock pick for the week. “Merck’s undervalued pharma shares could get a boost from its COVID-19 antiviral. “Excitement over potential Covid-19 vaccines has lifted the shares of Pfizer (PFE), Moderna (MRNA), and others, but has passed Merck by. Unlike Pfizer and Moderna, which are using novel vaccine technology that will require two doses, Merck is using established technology to develop two Covid vaccines that are designed to work with a single dose. These could give Merck an edge. And one could be available in an oral form, making it easier to administer.” Bary, Andrew. “Merck is Barron’s Stock Pick This Week. Here's Why.” Barron’s. August 14, 2020. The ETF GERM is an alternative to purchasing one or two pharmaceutical stocks. Buying GERM allows you to purchase a basket of the COVID-19 and infectious disease treating pharmaceutical companies.

China

Trade tensions between the US and China will end up costing US companies trillions if the two countries don’t come to a resolution quickly. “U.S. companies have $700 billion in assets in China, generating $500 billion in domestic sales every year. But the relationship between the two nations has irrevocably changed, upending the way American companies operate in China, and jeopardizing their growth and investment plans, as well as their profitability…Deutsche Bank’s global technology strategist, Apjit Walia, estimates that a full-blown cold war could cost the worldwide information and communications technology sector $3.5 trillion in just five years—a conservative estimate that excludes aftershocks, like boycotts and visa restrictions…Chip maker Qualcomm recently warned that the Huawei export ban could send $8 billion annually in sales to its foreign rivals…Apple sources most of its products in China and gets 15% of its sales there.” Kapadia, Reshma. “Stocks Likely to Survive the US-China Decoupling.” Barron’s. August 14, 2020. Both countries should be motivated to develop a workable trade agreement quickly.

China is continuing to have the strongest growth recovering from the pandemic since COVID-19 originated there. “China continued to build on its post-corona virus recovery in July, though momentum cooled slightly as challenges at home and abroad piled up and Beijing eased off stimulus measures. China’s factories continued to lead the recovery last month, though the 4.8% expansion in industrial production from a year earlier, matching June’s increase, undershot economists’ expected 5.0% increase, according to data released Friday by the National Bureau of Statistics…Friday’s data, though slightly missing projections, shows that the recovery in the world’s second-largest economy remains on track, said Ding Shuang, an economist at Standard Chartered. Even so, Mr. Ding warned: “It’s hard for the growth rate to accelerate further.” Cheng, Jonathan. “China’s Recovery Loses Some Momentum as Retail Sales Disappoint Again.” WSJ. August 14, 2020. Like the US, China’s retail numbers will continue to improve as consumers resume their buying habits and mobilize the extra funds that they have been saving during the pandemic.

China’s national security law is having a chilling effect on Chinese students going to school in the US. Their online presence is being closely monitored by China. Many students could face significant punishment for their social media comments that China deems seditious. “The effect of the new national-security law that China imposed on Hong Kong is extending far beyond the territory to American college campuses. Classes at some elite universities will carry a warning label this fall: This course may cover material considered politically sensitive by China. And schools are weighing measures to try to shield students and faculty from prosecution by Chinese authorities. At Princeton University, students in a Chinese politics class will use codes instead of names on their work to protect their identities. At Amherst College a professor is considering anonymous online chats so students can speak freely. And Harvard Business School may excuse students from discussing politically sensitive topics if they are worried about the risks.” Craymer, Lucy. “China’s National Security Law Reaches Into Harvard, Princeton Classrooms.” WSJ. August 19, 2020. Chinese students that come to the US for college are having to walk a very tight rope.

ESG

Environmental, Social, and Governance investing is gaining increased popularity and is a strategy that is generating excellent returns in many cases. Please let me know if you would like a recommendation for a dependable ESG investment. “Sustainable investing has been on a tear. The Covid-19 pandemic, social unrest, and a spotlight on global economic inequality has driven $21 billion into exchange-traded funds that focus on investing based on environmental, social, and governance, or ESG, factors in the first half of 2020. That’s nearly the amount of inflows for all of 2019, and four times the previous annual record.” Liu, Evie. “ESG Investors Can Beat the Market Without Apple, Amazon. Here’s How.” Barron’s. August 14, 2020. ESG investments include companies that are environmentally conscious, have excellent working conditions for their employees, promote diversity, have a commitment to a reasonable executive compensation system, have excellent management, and utilize practices that promote sustainability in their products, services, practices, and standards. These companies hold themselves to a higher standard. These companies are working to make a local, national, and global mark and difference.

Financial Education for Kids of All Ages

Jackson National has some fun and financial educational cartoons/animated episodes as part of their Cha Ching series that you can share with the favorite young people in your life. Please click here for a link on my website to share those fun videos with your young family/friends.

Miss a Previous Email from the COVID-19 Pandemic Recovery Series?

Please click here for a link to all the previous emails that I've sent out during the COVID-19 Pandemic Recovery. Please share them with your friends and family. If anyone you know has questions about the market, their portfolios, saving, investing, etc., please let me know. With their permission, I would be honored to call them.

Upcoming Seminars

Please save the date to join us for the September seminar on Tuesday, September 22nd from 11:30am-1pm featuring Rebecca Pearson with Dunham Funds. She will present COVID-19 Virtual Self Care: Improving the Five Domains of Well Being. It’s a great presentation. Rebecca has created some great seminar handouts for your reference. Please register early to get the materials mailed to you in advance.

Thank you for reading!

This is a great time to consider completing a financial plan, portfolio review, and/or insurance review. This is also a great time to do your estate planning. I am always delighted to recommend service providers from estate planning attorneys, CPAs, mortgage brokers, bankers, attorneys, title companies, realtors, etc. Thank you for your time!

Please let me know if you would like to schedule a time to talk, meet in person, or over Go to Meeting. Alicia, Rocio, and I are all here to help. Take care! Stay safe! That's all for this week.

Best regards,

Happy Franklin

Financial Advisor

*Diversification does not guarantee a profit or protect against market losses. It is a method used to help manage investment risk.

**Although, past performance is not a guarantee of future results.

***Indexes are not managed, do not incur management fees, costs and expenses, and cannot be invested in directly. Past performance is not a guarantee of future results.