In our October 2020 market update, Ron Rough, Chief Investment Officer, shares both some encouragements and concerns and gives an update on how the portfolios are positioned.
October Stock Market Update Transcript
Hello, this is Ron Rough with a market update for October. Today I want to make three points. Number one, are there reasons to be encouraged by what we’re seeing in the market? Number two, are there any factors that should be a cause for concern? And then three, how are the FSA portfolios positioned, given points one and two?
So to start with, let’s look at the S&P 500. If you look at a chart of the S&P 500 for this year of 2020, you can see that we had a large sharp drop in the first quarter which was followed by a very strong rebound in the second quarter. And here in the third quarter, the performance wasn’t quite as strong, but it was still a very good quarter.
So for us as technical analysts, this looks very healthy to us. When the market is able to recoup that kind of a drop that we saw in the first quarter, and I’m sure if you ask any observer of the market, no one would have predicted that a 30-plus percent drop in stocks in the first quarter would have been recaptured in just five short months. I’m sure it amazed everyone, including ourselves. So here we are. So it’s hard to be too negative with markets at these levels. Most areas of the market are in uptrends, and so it’s hard to be too negative.
But let’s think about some of the areas where maybe there is some cause for concern. So let’s take the same chart of the S&P 500, and if we just draw a horizontal line across the high from February, you’ll see that here we are back at the same levels that we saw in February. In technical terms, that’s called a double top, and it’s a potentially dangerous pattern because what we want to see is we want to see stocks break out above that level before we’re fully comfortable that it’s smooth sailing ahead. So that’s one cause for concern.
Now let’s look at this next chart. This is also the S&P 500. The purple line at the top is the same chart we showed before. Below it is the same 500 stocks in the S&P 500, but they’re equally weighted. Every stock in the index is weighted the same. So it has the same impact on the index. The S&P 500 index, the biggest companies have the biggest impact. Think of stocks like Microsoft, Apple, Google, Facebook. How they perform has a bigger impact than on how some of the smaller companies in the index perform. So what’s interesting to us and a little concerning is that big gap of 10 to 11% gap between the stocks in the S&P 500 index versus the equal weight index.
What we like to see, and in a healthy market, we want to see the troops outperforming the generals. When the generals, the biggest companies are outperforming the troops, that’s the sign of a market that may not be very healthy. So that’s another area of concern for us. And then, of course, the news we see all the time, unemployment rates still at 8%, which is high. The pandemic is still going and in some parts of the country and the world, we’re seeing upticks again. And then third, of course, we’re in the middle of a contentious presidential election. So who knows how that might impact stock returns.
So given all of these factors, how are the FSA portfolios invested? As you can see, all the portfolios are mostly invested, although if you look across at the money market positions here at the bottom, you’ll see that we do have some cash positions in the portfolio. In that September pull-back that we had, a few funds that we owned went through their FSA safety nets and so those were sold. So we are carrying a little bit of a cash cushion here in October, and we’re very comfortable with that. We like that the portfolios are mostly invested, but it’s nice to have that cash cushion in this time, October, right before an election, still with pandemic issues going on. So that’s a good balance for us.
So in general, the portfolios are invested to participate if the market continues to rally, but we do have a cash cushion in case the volatility or choppiness continues into the election. And obviously, we have the FSA safety net on every security, so if volatility really picks up and things begin to roll over, we’ll be very quick to sell anything that goes through that safety net.
So that’s all for today. Until our next update, thank you for watching.
Ron joined the FSA team in 2006 and is responsible for the day-to-day management of client portfolios, including portfolio construction, fund selection, and risk management. Along with his daily responsibilities, Ron contributes a monthly market commentary and develops presentations for clients and prospects.