ARTICLE
Another calendar month is about to close; financial markets closed ninety minutes ago. For the week equities, as measured by the broad S&P 500 Index, posted gains of approximately 1.7%. On a year-to-date basis, this index is now positive 1.13%. When we slice and dice this index (think broad stock market) into its various parts we get a different result, proving that the sum of all the parts doesn’t always equal the whole. The growth stock segment is the clear winner so far this year, posting gains of more than 17%. The value stock segment of our equity market was down approximately thirty basis points this week and for the year remains in double-digit negative territory with losses of more than 14%. On a capitalization basis (size basis) much can be said for the mid and small-cap segments. The charts shown below report the total returns and Price-to-Earnings Ratios for these investment styles and cap-weighted sectors as of the end of the second quarter, one month ago. The information is dated, yes, but the story one month later hasn’t changed. International equity markets are not fairing any better. Developed international equity markets posted negative results for the week and YTD, is down nearly 10%. Emerging markets posted a very modest gain, a little more than twenty basis points for the week. This asset class is posting losses of approximately 3.5% through today. To be clear, the results I’m reporting are based on the benchmarks used to measure the performance results of the securities comprising our equity universe and your portfolio. So, if most of the equity sectors are posting losses for the year, why is money continuing to flow into stocks on a global basis? I’ll suggest two reasons for your consideration. First, income-oriented investors are looking for current return and with interest rates as low as they are, stocks are about the only asset class one can turn to for meaningful yield. The chart I’ve included below shows the current yield for U.S. Treasury bonds ranging from one month to 30 years. Give particular attention to the changes that occurred since the first of the month. The yield decline represents a price increase in these bills, notes, and bonds, which explains why fixed-income assets are posting attractive gains for through July. The Barclays Aggregate Index is up more than 6%. But, the dividend yield for stocks, if the earnings estimates continue to have any connection to reality, approaches 2%. So, this is one plausible explanation. My second observation focuses on all the money global governments and central banks have thrown at this pandemic to keep their respective economy afloat. The charts below were prepared by Charles Schwab & Co. and reflect the government debt to GDP ratio for most of the developed world economies. The chart on the right shows the additional debt (stimulus) due to the pandemic. All this money will eventually find its way into the global economy. Domestically speaking, the initial stimulus package was designed and implemented to serve as a lifeline to the millions of newly unemployed Americans. This money, at least the majority of it, did not end up in personal savings and investment accounts, rather, it was used to create financial transactions that otherwise would not have happened. As we know, our economy depends on millions of transactions occurring every day. More money is coming from governments and central banks, as shown, and investors know this. But not all investment segments of the market are going to benefit at the same time. The same may be said of an economy. To date, many investors have placed bets on the technology sector, concentrated bets, actually. This activity is reflected in the performance of the growth segment, as noted above. Making measured bets is ok, in some instances, particularly for the speculative piece of one’s portfolio. Not every investor has or can afford to have a speculative segment in their portfolio. More importantly, it’s not appropriate for us/CFG to make bets with client assets. So, we don’t. We will, however, continue to prudently execute our management and portfolio construction process and leave the bets for the bookmakers and Vegas. Michael D. Puckett, AIFA® CFP® President, CEO CFG Wealth Management Services, Inc. A PERSONAL FINANCIAL FIDUCIARY® Organization 9840 Westpoint Dr., Suite 150 Indianapolis, IN 46256 1-888-234-9674
Another calendar month is about to close; financial markets closed ninety minutes ago. For the week equities, as measured by the broad S&P 500 Index, posted gains of approximately 1.7%. On a year-to-date basis, this index is now positive 1.13%.
When we slice and dice this index (think broad stock market) into its various parts we get a different result, proving that the sum of all the parts doesn’t always equal the whole. The growth stock segment is the clear winner so far this year, posting gains of more than 17%. The value stock segment of our equity market was down approximately thirty basis points this week and for the year remains in double-digit negative territory with losses of more than 14%. On a capitalization basis (size basis) much can be said for the mid and small-cap segments.
The charts shown below report the total returns and Price-to-Earnings Ratios for these investment styles and cap-weighted sectors as of the end of the second quarter, one month ago. The information is dated, yes, but the story one month later hasn’t changed.
International equity markets are not fairing any better. Developed international equity markets posted negative results for the week and YTD, is down nearly 10%. Emerging markets posted a very modest gain, a little more than twenty basis points for the week. This asset class is posting losses of approximately 3.5% through today. To be clear, the results I’m reporting are based on the benchmarks used to measure the performance results of the securities comprising our equity universe and your portfolio.
So, if most of the equity sectors are posting losses for the year, why is money continuing to flow into stocks on a global basis? I’ll suggest two reasons for your consideration.
First, income-oriented investors are looking for current return and with interest rates as low as they are, stocks are about the only asset class one can turn to for meaningful yield. The chart I’ve included below shows the current yield for U.S. Treasury bonds ranging from one month to 30 years. Give particular attention to the changes that occurred since the first of the month. The yield decline represents a price increase in these bills, notes, and bonds, which explains why fixed-income assets are posting attractive gains for through July. The Barclays Aggregate Index is up more than 6%.
But, the dividend yield for stocks, if the earnings estimates continue to have any connection to reality, approaches 2%. So, this is one plausible explanation.
My second observation focuses on all the money global governments and central banks have thrown at this pandemic to keep their respective economy afloat. The charts below were prepared by Charles Schwab & Co. and reflect the government debt to GDP ratio for most of the developed world economies. The chart on the right shows the additional debt (stimulus) due to the pandemic. All this money will eventually find its way into the global economy.
Domestically speaking, the initial stimulus package was designed and implemented to serve as a lifeline to the millions of newly unemployed Americans. This money, at least the majority of it, did not end up in personal savings and investment accounts, rather, it was used to create financial transactions that otherwise would not have happened. As we know, our economy depends on millions of transactions occurring every day. More money is coming from governments and central banks, as shown, and investors know this. But not all investment segments of the market are going to benefit at the same time. The same may be said of an economy.
To date, many investors have placed bets on the technology sector, concentrated bets, actually. This activity is reflected in the performance of the growth segment, as noted above. Making measured bets is ok, in some instances, particularly for the speculative piece of one’s portfolio. Not every investor has or can afford to have a speculative segment in their portfolio. More importantly, it’s not appropriate for us/CFG to make bets with client assets. So, we don’t. We will, however, continue to prudently execute our management and portfolio construction process and leave the bets for the bookmakers and Vegas.
Michael D. Puckett, AIFA® CFP® President, CEO
CFG Wealth Management Services, Inc. A PERSONAL FINANCIAL FIDUCIARY® Organization
9840 Westpoint Dr., Suite 150 Indianapolis, IN 46256 1-888-234-9674