Bear Pause – July 2020 Commentary

“We can complain because rose bushes have thorns, or rejoice because thorns have roses.”

Alphonse Karr, “A Tour Round My Garden”

Most investors have experienced a journey this past seven months resembling a round trip returning them to where they were at the onset of the year. Since the March 22nd market lows, portfolios with a 60/40 equity-bond allocation have generated a 30% return thereby, thankfully, resulting in their having insufficient time to adopt as their anthem Janis Joplin’s song lyric “sometimes you don’t know what you’ve got ‘till it’s gone”.


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July revealed a disconnect between the economic news and the performance of financial markets. In the three months of the second quarter the S&P 500 was up but at a decelerating rate of 12.7%, 4.5% and 1.8% for each of its three months but in July it reversed course rising 6%. Meanwhile, while new COVID-19 cases in Europe continued to decline to levels close to its disappearance in some countries while levels in the US increased to 50,000 daily representing 25% of the world’s reported cases.

The disconnect carried into the reported economic data with the US economic recovery evidencing signs of deceleration as parts of the US reversed their earlier steps towards the reopening of their economies while the economic data flowing out of Europe indicated their economies recovering at rates now exceeding that of the US. This reversal of fortune may be the source of the news items that captured the attention of market observers as gold made its first new historical high in ten years and the dollar experienced its greatest one month decline since April 2011. Curiously though, in contrast to the US, the equity markets of those very same economies, foreign developed markets, posted negative returns in local currency terms though US investors experienced modest positive returns due to the approximately 4% decline in the value of the US dollar.

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The current investment landscape is littered with additional signposts seemingly pointing in opposite directions. 63.6% of US households are optimistic about their personal finances which is near its high water mark this past ten years but only 21.6% are optimistic about the current state of the national economy thereby seemingly indicating that many of us view the current economic and financial challenges as someone else’s problem. An additional indicator that levels of pessimism about our economy may be exceeding its actual condition is that 79% of US corporations reporting earnings quarter to date are reporting numbers that exceed those expected, the highest “beat rate” of the twenty-one plus years of the 21st century to date.

The S&P 500 is up 46% from its March lows but market sentiment indicators reveal that twice as many investors expect the market to decline rather than continue its recovery. In fact, the indicators show a state of investor psychology that has rarely been so bearish. For twenty-three consecutive weeks bearish sentiment has exceeded bullish. The last time this occurred was in 1987. The six month average for market sentiment indicates twice as much bearish as bullish sentiment for the first time since the Global Financial Crisis on 2008-2009. The interesting difference between then and now is that rather than the market having gone down 40% as it had in March 2009 its up by that same amount.

Confirming that opportunity represents the distance between expectations and reality there have been thirty-seven prior instances where the six month average of bearish sentiment exceeded that of bullish by 12% since 1987. In the following three months the average return for the market was 10.7%, 15.12% in six months and 22.6% one year. NOT ONCE IN THOSE THIRTY-SEVEN INSTANCES WAS THE MARKET LOWER ONE YEAR LATER.


Mark H. Tekamp

August 2, 2020