After an exceptionally strong August month that saw major stock market indices including the S&P 500 and Nasdaq achieve new highs, some volatility returned to markets this week, largely driven by some profit taking in technology companies. As discussed in last week’s newsletter, much of the performance in U.S. stock markets year-to-date has been driven by a handful of technology companies including Apple, Microsoft, Google, Amazon and Facebook, and therefore some profit taking is not unusual and generally healthy for stock markets.
To provide some context of how well the above mentioned companies have performed; at the start of the year the combined market value of these companies represented 18% of the overall S&P 500’s market value. Today they constitute more than 24% of the S&P 500's market value, highlighting the leadership of mega-cap technology names. As the median company in the S&P 500 is still, on average, notably below its previous high, it suggests that broad market valuations are not as stretched as recent performance might suggest, leaving further room for stocks to move higher over the broader term.
Turning our attention to economic news, U.S. unemployment fell to 8.4% from 10.2% in July. This indicates that 48% of the jobs lost during March and April have been recovered in the past four months. The Fed’s Beige Book report also showed that U.S. business activity ticked up through late August, but economic growth was generally sluggish. To support this, the Fed continues to move down the credit quality curve and is now buying mortgage bonds at a record pace in an attempt to blunt the recession. They now own a third of bonds backed by American home loans.
In Europe, unemployment climbed unexpectedly to a level of 7.9% in July from 7.7% in the prior month. The market expects the ECB to step up its bond-buying program later this year, as a faltering recovery and a stronger euro threatens price declines. The median economist prediction is for a 350 billion euro increase in bond buying.
Meanwhile, China’s Manufacturing PMI Index registered an unexpected rise to a level of 53.1 in August from a level of 52.8 in July. Tensions between China and India continue to flare up over the disputed Himalayan mountain border in the region of Ladakh. India has banned 118 apps with links to China, saying they were “hostile to national security.”
Global equity markets ended the week lower driven by some profit taking. In the U.S., the Dow Jones (-1.82%), S&P 500 (-2.31%) and Nasdaq (-3.27%) Indices were all under pressure. Similarly, the Euro Stoxx 50 (-1.67%), FTSE 100 (-2.77%), Shanghai Composite Index (-1.43%) were all negative, with the Nikkei 225 Index (+1.41%) bucking the trend, ending the week in positive territory.
Market Moves of the Week
Locally, it was a busy week for South Africa including a positive outcome from last weekend’s ANC National Executive Committee (NEC) meeting whereby President Ramaphosa appears to have emerged from it stronger and more decisive regarding South Africa’s fight against corruption.
On a less positive note, rolling blackouts returned to the local economy this week. At the same time, data released showed that on a year-on-year basis, electricity production eased 4.5% in July, whilst consumption declined by 3.5%. A number of state-owned companies have also requested bailouts from the government to help them weather the impact of the coronavirus crisis. Amounts requested include: R4.9bn for the Post Office and R1.5bn for the South African Broadcasting Corporation (SABC).
The JSE All Share Index ended the week down -3.89%, with all three of the major sectors including industrials (-4.12%), financials (-6.31%) and resources (-2.55%) weaker. Whilst the rand strengthened to R16.62 to the U.S. Dollar by Friday close, it depreciated against both the Euro and Pound Sterling, suggesting U.S. weakness as opposed to rand strength.
Chart of the Week
This week’s chart looks at the recent strength of the British Pound. British stocks are underperforming in large part due to the pound’s strength. The FTSE-100 is dominated by multinational companies, whose profits look much better when the pound is weak. But the latest round of dollar weakness has brought the pound to its strongest level against the U.S. Dollar since early 2018, months before the bid to win parliamentary approval for Brexit degenerated into a crisis. A strong pound may also not be helpful as Britain tries to work out what a future outside the EU will look like. Source: Bloomberg Opinion.
Whilst volatility is likely to continue amid current market uncertainty over the coronavirus disease, our message to all investors remains the same – stay calm in making decisions that are aligned with your long-term goals, not current market conditions. In any market environment, we strongly believe that investors should stay properly diversified across a variety of asset classes and that clients financial plan supports their long-term goals, time horizon and tolerance for risk.
The information contained herein as well as the individual companies and/or securities mentioned should not be construed as investment advice, a recommendation to buy or sell, or an indication of trading intent on behalf of Carrick or any financial product. This communication is intended to be used for information purposes only by its designated recipients and is not an offer, recommendation or solicitation to transact. While it is based on information freely available to the public and from sources believed to be credible and reliable, Carrick Wealth makes no representation that it is accurate or complete or that any returns indicated will be achieved. Carrick Wealth is a registered South African financial services provider specialising in South African and international financial planning and integrated wealth management solutions. The Carrick corporate group is also licensed in Zimbabwe and Malawi, and holds three global licences in Mauritius.