Category: Investments

Author: Tim Courtney

Reading Mixed Market Signals

Date: 08/28/20

The S&P 500 hit multiple record highs this week, closing at 3,484.55 for the first time ever on Thursday.1 With U.S. large-cap stocks hitting highs, you might expect other, non-related asset classes to be behaving differently. However, this has not been the case.

 

For example, gold, which often moves inversely with equities, logged an all-time high on Aug. 4 by crossing the $2,000/oz threshold.2 Commodities, one of the worst-performing assets of the last decade, have experienced its best four-month stretch since the second quarter of 2016.3 The 10-year Treasury also reached historically high prices with the yield falling to 0.52% on Aug. 4.4 Nationally, housing prices were 4.3% higher in June than they were in June 2019.5


While the economy remains in recession, many asset classes are trading at or near record-breaking valuations. Interestingly though, these prices are transmitting different messages. Equities are signaling optimism and a quick recovery. Gold, viewed as a safe-haven asset and store of value, is indicating market uncertainty and heightened inflation concerns. Bond prices are flashing a warning sign that weakness and a deflationary environment may be ahead.


Amid all of these mixed signals, it is increasingly difficult to develop well-founded conclusions and make substantiated investment decisions. Until we see positive fundamental improvements in measures like consumer confidence, unemployment and earnings, we need to take current market indicators with a grain of salt. It is very likely these market signals are now communicating contradictory messages primarily because of the unprecedented actions of the Federal Reserve6, and we may continue to see false signals in market prices moving forward.7


As we have mentioned previously, we believe the economy will recover from this recession as it has done in prior health emergencies and that companies will continue to evolve their businesses and grow their earnings. In the near term though there are still many unknowns and as such, it’s important we remain diversified in portfolios to be properly prepared for what comes next.


If you have any questions regarding your asset allocations, please contact your financial advisor.


Sources:

1. USA Today (8/27/20) – S&P 500 pushes further into record territory as Fed plans to keep rates lower for longer; Dow also soars
2. MarketWatch (8/4/20) – Gold ends above $2,000 for the first time in history as U.S. dollar and bond yields recede
3. DFA Returns 2.0 (7/31/2020) – Bloomberg Commodity Index
4. U.S. Department of the Treasury (8/28/20) – Resource Center, Daily Treasury Rates
5. MarketWatch (8/25/20) – Home prices continued to rise in June Case-Shiller index finds
6. Reuters (7/13/20) – Federal Reserve's $3 trillion virus rescue inflates market bubbles
7. CNN Business (6/10/20) – Fed says it will keep stimulus coming for years


The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.


The Bloomberg Commodity Index (BCOM) is a broadly diversified commodity price index that tracks prices of futures contracts on physical commodities in the commodity markets. The index is designed to minimize concentration in any one commodity or sector. It currently has 23 commodity futures in six sectors. No one commodity can compose more than 15% of the index, no one commodity and its derived commodities can compose more than 25% of the index, and no sector can represent more than 33% of the index (as of the annual weightings of the components).


The S&P CoreLogic Case-Shiller National Home Price Index measures the change in the value of the U.S. residential housing market by tracking the purchase price and resale value of single-family homes that have undergone a minimum of two arm's-length transactions. The index, widely viewed as a barometer of the U.S. housing market and broader economy, is named after two of its creators: Karl Case and Robert Shiller.

 

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About the author

4054781971

tcourtney@exencialwealth.com

Oklahoma City, Ok

Chief Investment Officer

Tim Courtney serves as Chief Investment Officer of Exencial Wealth Advisors and chairs the investment committee. He attained the Certified Investment Management Analyst (CIMA) designation in 2005 a... CLICK HERE TO READ MORE