August Market Overview
Global equity markets continued their feverish climb in August, propelling several benchmarks – including the S&P 500, which gained 7.2% in the month – to all-time highs.
In the U.S., large cap growth stocks (as measured by the Russell 1000 Growth Index) continued to lead the way, up 10.3% in August, driven by continued momentum in mega-cap Technology stocks, while U.S. large cap value stocks (as measured by the Russell 1000 Value Index) climbed 4.1% for the month.
We believe that the rally in stocks has been driven by continued loose monetary policy, corporate earnings that beat Wall Street expectations by a wide margin, and based on hopes that a COVID-19 vaccine will be successfully developed sooner rather than later. In fact, companies that have been hit the hardest by the pandemic – and those poised to benefit most from a recovery – rose sharply in August as investors grew more optimistic about the prospects for a vaccine.
We believe investor outlooks on the post-COVID economy are contributing to the dichotomy between large cap growth companies and “everything else,” as a view takes hold that COVID-19 has accelerated a structural change in where and how consumers spend and what they are spending on.
These dynamics have driven a notable valuation gap between growth stocks and value stocks. In fact, the Russell 1000 Growth now trades at a 62% premium vs. the Russell 1000 Value, a near record disparity since the dot-com bubble, and well ahead of the 33% average premium over the last five years.
We appreciate that companies with superior growth prospects justify higher valuations, particularly in a low interest rate environment; however, we submit that the unstoppable rally in many large cap growth stocks is fueled by momentum and a “flight to quality” at any price.
Meanwhile, most major fixed income indices declined for the month as the risk-on trade continued. Late in the month, the Federal Reserve announced some changes to its inflation targeting policy, indicating that it will now allow inflation to rise above the prior 2% target following periods of lower inflation. Still, inflation has been generally subdued in recent years and we expect that to continue for the foreseeable future. In any case, the Fed’s updated policy suggested to investors that interest rates are likely to remain very low for quite some time.
Looking ahead, we anticipate markets will continue to be driven by news on the COVID-19 pandemic, including the prospects of vaccines, treatments, and additional waves of outbreaks, as well as stimulus measures aimed at combatting the severe economic impacts the virus has caused. We are also mindful of the upcoming U.S. elections and would not be surprised to see some transient periods of volatility later this Fall.
While it seems unimaginable that major equity indices are making new all-time highs amid a global pandemic, we feel this illustrates the virtues of maintaining a balanced view, managing risk, and staying the course, which is precisely the mantra that MACRO continues to follow.
The monthly Market Overview is written by two members of MACRO’s Investment Committee, Mark Cortazzo, CFP®, CIMA®, and Christopher Moffett, CFA.
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