August 2020 Financial Markets Summary

2020 has been a year for the record books… and it’s only August!  The markets have experienced an unprecedented amount of volatility with the fastest 30% or more domestic stock market decline in history, the biggest quarterly decline in GDP since 1947 and many well-known company bankruptcies such as Hertz, GNC, and J.C. Penny to name a few.  But, if we step back and look at the S&P 500 from January 1^st to July 31^st, despite all of this negative news, the index is actually still up over 1%.

We are not suggesting there are only clear skies ahead as we are contending with the uncertainties of a global pandemic, ongoing geopolitical tensions, and the upcoming U.S. Presidential election.   In the midst of this, it is important to recognize that financial markets will continue their typical short-term fluctuations.  Historically, investors have benefited by enduring the ebbs and flows of the market by keeping their sights on the long-term.  Rather than constantly reviewing your portfolio balance, you can avoid unnecessary stress by taking a step back and looking at the big picture.

Many are also wondering why the market continues to climb when we are inundated with negative news.  Barry Ritholtz from Ritholtz Wealth Management, LLC recently put it well when he said, “The most visible and economically vulnerable industries are also among the smallest, based on their market-capitalization weight in major indexes such as the S&P 500.  Markets, it turns out, are not especially vulnerable to highly visible but relatively tiny industries.”

For example, department stores are down -62.6% year-to-date, travel services -51.4%, oil and gas equipment services -50.5%, resorts and casinos -45.4% and hotel and motel REITS -41.9%.  However, department stores only account for a measly 0.01% and airline only represent 0.18% of the S&P 500.

The largest sectors and industries in the S&P 500 index are technology, healthcare, communications, financials and consumer discretionary which each account for over 10% and combine to represent nearly 75% of the overall index.  Technology, in particular, has been the leading driver to the quick recovery as tech stocks now account for over 25% of the index.  Many of these companies have actually experienced growth throughout this pandemic as it forced more consumers to adapt to new technology.  We will continue to experience volatility throughout the year, but try not to focus your attention on these small visible industries that have little impact on your overall portfolio.