5 key drivers for stocks in the near term


Anthony Saglimbene, Ameriprise Global Market Strategist – Ameriprise Investment Research Group

Financial market ticker

As of Sept. 10, 2020

Key Points

  • Stock indexes soared higher since pandemic lows, recording their best August performance in over 30 years.
  • Coming into September, stock valuations in certain areas of the market were stretched higher.
  • We’ve identified five factors in current market conditions to consider discussing with your Ameriprise advisor.

Data source: FactSet1

 

The S&P 500® Index finished last month up +7.2%, its best August performance since 1986. The index also gained more than +35% between April through August, capping its best five-month stretch since 1928, according to Bespoke Investment Group.

A number of developments have fueled the equity rally since March:

  • Over $20 trillion in monetary and fiscal support.
  • Positive economic surprises such as improving labor trends.
  • Second-quarter profits that exceeded forecasts.
  • Optimism toward a potential coronavirus vaccine.

In addition, strong stock performance in July and August attracted more investors and stretched valuations higher across growth companies, semiconductors, cloud computing and stocks tied to the work-from-home trend. Also, gains across the broader Technology sector have been outsized relative to just about every other sector this year.

As the season changes from summer to fall, here are five key market drivers we believe investors could discuss with their Ameriprise advisor.

There is no alternative for investors. Stocks currently have an edge over bonds, in our view, because of a 10-year U.S. Treasury yield stuck below 1.0%, the promise of extreme monetary policy support for as far as the eye can see and lower equity risk premiums. In simple terms, these TINA (There Is No Alternative) market conditions force investors into equities to generate a return. That environment is not likely to change over the intermediate term. Even with the significant rally in stock prices since the March bottom, the S&P 500 dividend yield stands roughly a full percentage point above the 10-year Treasury yield. This means stocks offer a better yield, with the potential for growth.

The market sits at elevated levels based on corporate and economic fundamentals. Coming into September, technical indicators (e.g., relative strength indicators and moving day averages) suggested buying activity was stretched over the near term. As a result, we believe many traders were well-positioned for upside price strength with little protection against a market pullback. Price corrections early in the month helped relax some of the most extreme overbought conditions in Technology and high-momentum stocks. Moving forward, economic and COVID-19 conditions likely will need to improve to justify current stock levels.     

More stocks may need to contribute to market gains. Technology giants who benefit from the COVID-19 economy have produced the lion’s share of gains in the S&P 500 this year, masking the subdued performance trends across the majority of other stocks. Through Sept. 10, if the five largest stocks in the S&P 500 (Microsoft, Apple, Amazon, Facebook and Alphabet) are excluded from the year-to-date returns, the index would move from a +4.7% return in 2020 to a -2.9% loss. For the S&P 500 to continue climbing, we believe cyclical areas may need to perform better, particularly if improvements in economic activity continue through the rest of the year.

The Washington wildcard has implications for investors. All eyes are on Washington in the near term. Stock returns from October through December are usually positive from a historical perspective. The market expects an eventual deal on stimulus relief, a generally tight presidential race and the likelihood of a divided Congress. Any changes outside of these expectations could create near-term bouts of market volatility.

Keep sight of the bigger picture. With stock prices near all-time highs and a global economy in the early stages of recovering from the pandemic, we view the market from two angles today.

First, market direction could be choppy and more volatile over the very near term as stocks attempt to discount election results and consolidate their record gains from the pandemic lows. For sectors like Technology, selling pressure could create better long-term buying opportunities.

Second, we continue to believe there is still room for upside gains in cyclical areas of the market that haven’t kept pace with the big tech stocks. Over the next six to 12 months, economic and profit growth overall should trend higher. This would give industries and stocks tied to a more normal environment an opportunity to catch up. On both fronts, in our view investors should stick to high-quality, best-in-sector investments in their portfolios.  

 

 

 

Data source for indices and sector graphs: Morningstar Direct, as of September 7, 2020. 

Past performance is not a guarantee of future results.

 

1 Unless otherwise noted, all data is sourced from FactSet as of 8/31/20. FactSet is an independent investment research management company that compiles and provides financial data and analytics to firms and investment professionals.