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Crosscurrents in August: Stocks Heat Up as Economic Rebound Cools

By Kara Murphy

Eager to escape their homes — but not to board planes — millions of Americans hit the road this summer. My family was no exception. A few weeks ago, we piled into our car and made the long journey from Dallas to a beachside town in Florida. The road trip gave us more than a few opportunities to look up from our mobile devices and across the vast American landscape.

As we took in the scenery, I couldn’t help but think of the old adage about how the market tends to look across the valley and see the other side. It seems to ring especially true this year, when U.S. stocks have staged a months-long recovery amid lingering economic pain. In August, the S&P 500 hit new highs even as the pandemic flared in various states and many business owners worried about possibly having to permanently close up shop.

The disconnect between what’s happening on Main Street and Wall Street has confounded many investors. But it’s important to remember that the businesses that make up Main Street and Wall Street tend to be quite different.

Privately held small businesses generally have less access to capital than publicly traded firms, which can hinder their ability to weather this prolonged crisis, although government emergency support has mitigated the damage. Mom-and-pop shops may also find it harder to quickly pivot to meet new consumer demands — such as curbside pickup and delivery — than, say, large retail or restaurant chains. It’s also worth noting that the direction of the market signals where investors (rightly or wrongly) think the economy’s headed, not tomorrow, but months down the road.

Key Takeaways

  • The U.S. stock market rallied for a fifth straight month on data pointing to economic improvements and better-than-expected corporate earnings.
  • The U.S. bond market lost ground in the month, led by longer-dated U.S. Treasury bonds, amid general credit spread tightening.
  • Positive economic signs, like robust home sales and durable-goods orders, were offset by contemporaneous data pointing to a slowdown in the recovery that began in April.

Equity Markets

The broad U.S. stock market, represented by the S&P 500 index, rallied for a fifth straight month. The index eclipsed its all-time high in mid-August, recouping all of the bear market losses from the first quarter of 2020.

Last month’s rally was driven in large part by data pointing to a continued economic recovery (more on this below), strong gains in technology shares and better-than-expected corporate earnings for the second quarter, which coincided with the loosening of restrictions on business activity in many parts of the country.

According to data firm FactSet, 84% of S&P 500 companies beat analysts’ expectations for earnings in the second quarter, although, admittedly, those expectations were lowered substantially earlier in the year. Interestingly, the second quarter marked the highest percentage of companies reporting a positive earnings surprise since FactSet began tracking this metric in 2008. FactSet also reports that, since June, analysts have raised their earnings estimates for the full year.

Given the market’s dramatic recovery since March, many investors have wondered if it’s overvalued. To shed light on this question, it’s important to put current valuations (stock prices relative to earnings per share) in historical context. When we compare how current valuations stack up against those during comparable periods of low and steady inflation, what we find is that the market is, in fact, more highly valued lately than what you might expect under the circumstances, but only slightly so.

In general, we expect U.S. stocks to experience mid-to-high single-digit returns in the near term, and for the U.S. bond market (generally represented by the Bloomberg Barclays U.S. Aggregate Bond Index) to post returns in the low-to-mid single digits.

U.S. Sectors

The Technology sector retained its leadership position in August, ending the month up 12%. The sector has gained a whopping 58% for the trailing 12 months through August.

Tech has long been a market leader, but that has been especially true during the pandemic. The shuttering of offices, schools, theaters and other public spaces has only accelerated demand for online shopping, content streaming, video conferencing and the cloud-computing platforms underpinning these services. The big question on the minds of many investors is whether the sector will continue to enjoy strong earnings and growth in users as the pandemic wears on or, better yet, dissipates.

Consumer Discretionary and Industrials, both cyclical sectors, also saw robust returns in August. As the economy has recovered, many investors have eased out of defensive sectors (like Utilities) and poured more money into cyclical sectors, which tend to do well when growth is on the upswing.

Fixed Income

The broad bond market, as measured by the Bloomberg Barclays U.S. Aggregate Bond Index, lost ground in August.

Over the past month, the appetite for bonds, particularly government-issued debt, has waned as the economy has improved, and investors have generally grown more comfortable taking on higher levels of risk. Low interest rates have also tended to dampen return expectations for bonds.

With the Federal Reserve widely expected to keep its benchmark rate near zero for the foreseeable future, many investors have asked whether bonds still make sense. We tackled this question in last month’s commentary, but here’s my take on it again: Bonds continue to play an important role in a diversified portfolio, both in terms of buffering stock-market declines and generating income.

We saw evidence of the inverse relationship between stocks and bonds in late February and March, when stocks suffered a steep downdraft and bond prices surged. Even with the stock market’s recent recovery, returns for longer-term Treasurys have outstripped those for U.S. equities in 2020. Bloomberg’s U.S. Treasury 10-20 Year Index, composed of Treasury bonds with between 10 and 20 years to maturity, returned 16.5% through the end of August, while the S&P 500 had gained just 9.7%.

The Economy and the Fed

Thanks to the lifting of containment measures in many areas and unprecedented fiscal and monetary stimulus, the U.S. economy was on firmer footing last month than it was in the late spring.

Good news on the housing and manufacturing fronts helped to fuel investor optimism in August:

  • The Commerce Department reported that new orders for durable goods rose by slightly more than 11% in July from the previous month. The increase marked the third straight month of higher sales of durable goods, which are products designed to last at least three years.
  • The National Association of Realtors reported that existing home sales surged by nearly 25% in July. The increase, fueled by historically low interest rates and pent-up demand, marked the second straight month of robust gains in existing home sales.

Despite such positive signs, the recovery that began in April appears to have lost some momentum lately, owing to the spike in COVID-19 cases in certain regions. The emergence of new hotspots has led to greater caution among consumers and caused some states and cities to rethink their reopening plans.

Google mobility indexes for retail and recreation, transit stations and workplaces have moved mostly sideways since roughly mid-June, around the time COVID-19 cases began trending upward again, according to a report released in mid-August by our colleagues in Goldman Sachs Investment Strategy Group (ISG).

As investors consider whether the recovery has indeed slowed down, there’s still a question as to whether Congress will be able to negotiate a fourth stimulus package.

The Federal Reserve may have indicated the need for further action. In minutes from the July meeting of the central bank’s Federal Open Market Committee, some members of the committee said more fiscal aid would likely be “important for supporting vulnerable families, and thus the economy more broadly, in the period ahead.”

As of early September, GIR expected the U.S. economy to shrink at an annual rate of -3.3% in 2020 and to grow by 6.0% in 2021.


Over the last few months, it’s become clear that this crisis is lasting longer than many of us originally anticipated. Much like a long road trip, it has tested our collective patience and taken us on unexpected detours. But when we look in the rearview mirror, we see that that we are making progress, both on the economic front and in our efforts to adapt to the virus and develop new treatments and vaccines.

In the coming weeks and months, we’ll get more clarity on key questions, such as to what extent infection rates will rise this fall and whether Congress can enact another substantial stimulus package in short order. In keeping with our road-trip metaphor, be prepared to buckle up and ride out any market volatility as you work toward your long-term goals in partnership with your advisor.

Invest well and stay healthy,

Kara Murphy, CFA®

Chief Investment Officer 

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Index Definitions

S&P 500 Index: A broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. It is a capitalization-weighted, unmanaged index that is calculated on a total return basis with dividends reinvested. The S&P 500 represents about 75% of the NYSE market capitalization.

Russell 2000 Index: This index measures the performance of approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks; the index serves as a benchmark for small-cap U.S. stocks.

MSCI Europe, Australasia, and Far East (EAFE) Index: This index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada.

MSCI Emerging Markets Index: This index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. As of June 2009, the MSCI Emerging Markets Index consisted of the following 22 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

Bloomberg Barclays U.S. Aggregate Bond Index: This is a market capitalization weighted bond index of investment-grade, USD-denominated fixed-income securities.

U.S. High Yield Corporate: The Bloomberg Barclays U.S. Corporate High Yield Bond Index measures the USD-denominated, high-yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch, and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Barclays EM country definition, are excluded.

U.S. Investment Grade Corporate: The Bloomberg Barclays U.S. Corporate Bond Index measures the investment-grade, fixed-rate, taxable corporate bond market. It includes USD-denominated securities publicly issued by U.S. and non-U.S. industrial, utility, and financial issuers.

Bloomberg Barclays Municipal Bond Index: The Bloomberg Barclays U.S. Municipal Index covers the USD-denominated, long-term, tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds.

S&P 500 GICS Sectors Level-1: In 1999, MSCI and S&P Global developed the Global Industry Classification Standard (GICS) to offer an efficient investment tool to capture the breadth, depth, and evolution of industry sectors. GICS is a four-tiered, hierarchical industry classification system. It consists of 11 sectors, 24 industry groups, 68 industries, and 157 sub-industries. Companies are classified quantitatively and qualitatively. Each company is assigned a single GICS classification at the sub-industry level according to its principal business activity. MSCI and S&P Global use revenues as a key factor in determining a firm’s principal business activity. Earnings and market perception, however, are also recognized as important and relevant information for classification purposes and are considered during the annual review process.

Kara Murphy

Kara Murphy

United Capital Financial Advisers, LLC d/b/a Goldman Sachs Personal Financial Management (“GS PFM”) is a registered investment adviser and an affiliate of Goldman Sachs & Co. LLC and subsidiary of The Goldman Sachs Group, Inc., a worldwide, full-service investment banking, broker-dealer, asset management, and financial services organization.

The information contained herein is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. GS PFM does not provide legal, tax, or accounting advice. Clients should obtain their own independent legal, tax, or accounting advice based on their particular circumstances. Please contact your financial adviser with questions about your specific needs and circumstances.

Information and opinions expressed by individuals other than GS PFM employees do not necessarily reflect the view of GS PFM. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice.

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