Coronavirus Update: August 7, 2020

by Jason Gunkel, CFP®, CFA, CAP®, Chief Investment Officer | August 6, 2020

The U.S. stock market (as represented by the S&P 500 Index) has continued its recovery the first week of August with it being up over 2% through August 6. Investors continue to see the positive side of economic and market news being reported.

Weekly jobless claims released Thursday were still at a high level for the week ended August 1 at 1.2 million, but this number was lower than expected and the lowest level since the pandemic began. The July jobs report released today showed that 1.8 million more jobs were added to the U.S. economy which was lower than last month but still exceeded expectations. The unemployment rate has fallen from a peak of about 15% this year down to about 10%, all according to Yahoo Finance.

Companies are continuing to report their earnings results for the second quarter (with about 60% reporting so far). While earnings for the S&P 500 as a whole declined by over 35% for the quarter compared to last year, the vast majority of companies (over 80%) have beat their low earnings expectations, according to FactSet.

The Federal Reserve met at the end of July and left interest rates near zero and reiterated its commitment to use all of its tools necessary to help support the economic recovery. Investors focused on that message despite the Fed's continued warning that the pandemic “poses considerable risks to the economic outlook over the medium term.”

Investors have also remained optimistic despite Congress’ inability to come to an agreement on a new stimulus package including the extension of additional unemployment benefits. The sides reportedly are still far apart on a deal, but both sides have indicated they are confident one will eventually be reached. In the meantime, unemployment benefits dropped by nearly two-thirds at the end of July for the 18 million Americans receiving the benefits, according to Schwab.

The top five technology giants in the U.S. which include Facebook, Apple, Amazon, Microsoft, and Google continue to have a huge impact on the U.S. economy and stock market.

These tech giants are the top five stocks in the S&P 500 making up more than 22% of the index, a degree of concentration that is even higher than the dot-com era of the late 90’s that was dominated by tech stocks. Only 10 years ago the top five stocks made up about 11% of the S&P 500, about half as much as today according to Schwab market research.

These stocks have played a huge part in the performance of the S&P 500 this year. They had an average return of over 36% through July this year while the S&P 500 was up only about 2%. Excluding these five technology stocks, the rest of the S&P 500 Index is actually down in value this year!

There is no doubt that these are great companies that have experienced amazing growth for a reason. And based on their current prices, investors seem to think that they can continue to grow at a very high rate. The average price-to-earnings ratio of these companies is about 53 which is more than double that of the S&P 500 Index as a whole, according to data from Morningstar. The forward price-to-earnings ratio of the S&P 500 is 21.5 which appears expensive and is at the highest level since the late 90’s bubble, according to Schwab.

While we advise that investors should own these stocks as part of their portfolio, we also believe that investors should be more diversified than most stock indexes’ current heavy concentration to these tech giants. The past success of high growth stocks can be hard to replicate. Investors might be wise to rebalance their portfolios into less expensive areas of the market that have more room to recover along with the broader economy.