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Dear clients and friends,

At Perseus Wealth it is very important to us that you are well informed about what’s happening in the markets.  Here is a brief recap of what has been going on over the last month or so and what we expect in the month ahead.

Equity markets continue to push higher as investors expect Congress and the Fed to continue pumping stimulus into the economy.  It is hoped that the new stimulus package will come by early to mid-August and will not be as robust as the first package.  The House passed a $3.5 trillion package in mid-May to “draw a line in the sand” to which the Senate was to react (1).  Senator McConnell’s office just released a roughly $1 trillion counter proposal with distinctly different emphases (2).  In an election year, expect negotiations to be fierce but a compromise likely reached.  Common to both bills is a continuation of some level of direct payments to qualifying households, an extension to the additional support of unemployment benefits (although substantially smaller and for less time under the Republican plan) and an extension of the PPP program for businesses.  If the stimulus package were to hit a snag and delay past mid-August, then expect substantial volatility in equity markets.

The European Union has reached an agreement on their own stimulus package worth roughly $2 trillion (3).  The negotiations were tough among the member nations, but ultimately a first-of-its-kind EU-backed debt issuance will be released to pay for the stimulus. The deal includes grants and loans to governments and businesses – but still requires approval by the individual governments of each member nation.  Given the complexity of getting approval from each county, the deal is unlikely to have a meaningful impact on the EU economy until well into 2021. Current expectations are for the EU economy to decline by 13% in 2020 (4), more than the IMF projected 8% drop in U.S. GDP for the year.

In addition to the expected US and EU stimulus packages, investors remain cautiously optimistic that a vaccine for COVID-19 is “around the corner” and will hopefully be available for distribution before 2020 is out.  If clinical trials continue to go well, markets should remain somewhat buoyed in the face of daily infection rates at their highest levels of the crisis. For the short term, however, the U.S. stimulus package and domestic economic data are far more important to equity market volatility than vaccine expectations.

A primary concern for equity markets lies within the forward expectations of corporate earnings at these price levels.  The last time equity valuations were at levels this high was during the dot-com bubble (5).  Either equity prices need to come down or economic data needs to improve quickly; the current environment of high market levels and low economic levels is not sustainable.  Since almost every economic data point is negative from this point last year, it appears equity markets have little sustained upside potential at these levels.

What's Going On?

Another concern is the concentration in the market indices of the companies having the five largest market capitalizations. These 5 companies, representing 1% of the number of companies in the S&P 500, account for 22% of the index value, compared to the former historical high weighting of 17% at the height of the dot com “mania” of the 90’s. 

To demonstrate their importance on the performance of the index, FactSet (Goldman Sachs Investment Research) research shows these five largest stocks up a whopping +35% year-to-date while the other 495 stocks are negative for the year by -5%.  The result? The index shows a positive result, up +1.4% YTD (7/22/20) – while 99% of the stocks are negative in the aggregate. Perhaps the most incredible statistic, however, is that they represent 49% of the QQQ (NASDAQ 100). This kind of concentration, compared to a “rising tide lifting all boats”, is generally associated with unhealthy and/or “topping” markets.

Finally, the “energy crisis” has largely disappeared from headlines but that does not mean the problem has gone away. The pandemic put a major crimp in oil demand and the spike in infections and deaths to worldwide records following business re-openings has thwarted any potential resurgence of that demand. Reversing the oil “glut” of April and May, reductions in productions – largely by the U.S. (due to shale pricing) and Russia (OPEC+ agreements) - combined with increasing global consumption as many countries start to recover from the first stages of the COVID-19 crisis, current oil supply is low. Following the OPEC monthly meeting, it appears Russian and some OPEC members wish to relax the current oil production agreement – potentially a sign that they believe a global economic recovery could be within a few months (6).  However, statements from Saudi Arabia show the Kingdom’s desire not to participate in the lion’s share of those changes, possibly putting them on another collision course with Russia once again. Unfortunately, US shale is still hurting and needs even higher prices to get back in the game, resulting in expected additional bankruptcies and defaults from US energy companies throughout 2020.

Bottom line:  The U.S. equity market is propped up by expectations of another stimulus package and a near term vaccine.  In the very short-term, equity markets should respond positively if an additional stimulus package gets done. Longer term, economic data needs to improve after the stimulus package is released or substantial levels of equity volatility may return.

As always, please call us with any questions.




John and Sean


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that any strategy will be successful.