In this month’s video market update, Derek Kravitz, Investment Analyst, discusses what segments of the market are driving strong returns and what history might lead us to expect.
August Stock Market Update Transcript
Hi, everybody. This is Derek, the investment analyst here at FSA, with your August 2021 market update. U.S. Stocks have managed to post some impressive returns here to date in 2021 with the S&P 500 Index up 18% through the end of July. But what segments of the market are driving those strong returns and what can history tell us about where the S&P 500 might end the year at? In this video market update, we will examine both of those questions in further detail.
To understand what is happening under the market surface this year, let’s first review the three main levers investors can pull to determine the type of equity exposure they can have. Large versus small companies, domestic versus international companies, and growth versus value companies. Think of Tesla versus Coca-Cola for this last category. When FSA’s equity portfolios are invested, the investment management team examines these categories on a regular basis to ensure that we are invested in the segments of the market with the best recent performance.
So far in 2021, there has been an epic battle for market leadership in each of these three categories. We started off the year with an environment where international stocks, small stocks, and value stocks were all the best performers, a trend that began in the fall of last year. However, in late spring of this year, we began to see a shift back towards larger domestic growth companies, a theme that had been largely dominant since 2017 with the exception being the last several months.
Since around Labor Day of last year, this group of large growth companies, such as Facebook, Apple, Nvidia, Microsoft, et cetera, had underperformed the broader S&P 500 Index giving smaller, more value-oriented names a chance to carry the markets higher. Now, we are once again seeing this cohort of large growth companies begin to outperform the market. As this has happened, we have begun to shift our positioning back into large growth stocks in the hopes that we can capitalize on a resurgence in this segment of the market after it having been dormant for almost a year.
In addition to this rotation back into large growth stocks, we have also witnessed a deteriorating market breadth. This is defined as the percent of stocks in an index that are participating in the index’s overall move higher. When only a handful of stocks are marching higher, breadth is low and serves as a potential warning sign for equity investors.
One way to measure this is to look at the percent of stocks in the index that are above or below their respective average prices over the last 50 days. According to Ned Davis Research, the percent of S&P 500 components above their critical 50-day moving average has fallen from around 90% at election time in November of last year to around 40% today. This is just one of the many indicators that the FSA investment management team watches to determine how strong the stock market is. While deteriorating market breadth is not a reason alone to sell our equity positions, we will continue to monitor this very close.
So how might equity markets perform through the end of the year? While past performance is never a guarantee of future returns, we can at least look to market history for some potential clues. The FSA investment management team looked back over the last four decades of S&P 500 return data and examined the performance of the index through the end of the year when it had been up as much as it is so far in 2021. The results reveal that the index went on to finish at a higher level in every year except 1987 when the infamous Black Monday stock market crash occurred.
Regardless of how the rest of the year might play out in the markets, we are currently in a seasonally weak period of the year with August and September returns historically being flat to negative, so it would not surprise us to see a pullback here. If so, the FSA Safety Net® stands ready in the event of a sell-off at any point in the remainder of the year.
As always, please feel free to contact us with any questions or comments at questions@fsainvest.com. Thank you for watching this August 2021 market update video. This has been Derek, the investment analyst. We hope to see and talk to you soon. Thanks.
FSA’s current written Disclosure Brochure and Privacy Notice discussing our current advisory services and fees is available at www.FSAinvest.com/disclosures or by calling 301-949-7300.
