September 3, 2020
What’s working continues to work. The S&P 500 posted its best return for the month of August since 1986, helping stocks complete a turnaround from a bear market to an all-time high at a record pace.

US stocks, which we continue to view as more attractive relative to other parts of the globe, outperformed international markets as earnings have snapped back faster. The growth style, where we hold a modest tilt, extended its outperformance relative to value. The technology sector, with a 12% total return for the month, extended its dominance, while other quasi-growth sectors—consumer discretionary and communications—also outpaced the market. Conversely, utilities, energy, and real estate—sectors we remain underweight—made fresh lows relative to the S&P 500. Earnings of small caps continued to improve, though price trends compared to large caps weakened over the past month, and we maintain our neutral view. International markets had a positive month, but on a relative basis to the S&P 500 made another 52-week low.

The 10-year US Treasury yield jumped 20 basis points (0.2%) from the intra-month low to finish August at 0.70%, resulting in a decline for core bonds for the month. However, high yield bonds were a standout to the upside, and we still see relative value for investors who can stomach the higher risk profile.
The good news for investors is the market strength seen over the past five months reinforces our view that we are in a bull market. The S&P 500 has been higher 26 of 27 times in the year following similar monthly winning streaks since 1950. Moreover, stocks tend to see further gains over the next year after making an all-time high, albeit at a more moderate pace than the recent blistering gains.

Importantly, rising earnings estimates have been the key driver of market returns over recent months. The Federal Reserve is also set to remain accommodative for the foreseeable future. This expectation has been further buttressed by the central bank recently shifting to a focus on average inflation targeting and prioritizing financial stability. The low interest rate backdrop will likely continue to push investors seeking higher returns into riskier assets.

That said, the market’s short-term risk-reward is becoming more mixed. We are seeing more crowding into growth names, while other areas lag. The average stock, as represented by the equal-weighted S&P 500 index, closed August below its June 8 high versus over an 8% gain for the more commonly followed S&P 500 market cap-weighted index during that same period. We would like to see participation broaden out for the health of the bull market. Volatility is also likely to rise as the election approaches.

Still, our focus remains on the primary market trend which is positive. Our work suggests we are likely in the midst of a multi-year bull market. For investors who are currently below longer-term equity targets, we would advise an average-in approach and becoming more aggressive should we see pullbacks later in the year.

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