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T2 Asset Management

Aug 2020 Market Commentary

Welcome to the Twilight Zone! As we write this, the S&P 500 looks poised to hit an all-time high in the next few hours. The alternative title for today’s commentary would have been “it’s déjà vu all over again,” as we seem to have travelled back in time to the dotcom boom. Not only do the markets seem to have just one direction now, but like then, it’s just a handful of stocks making the rise. FAAMG as it’s now called (Facebook, Apple, Amazon, Microsoft, Google) is about 25% of the entire value of the S&P 500. Even better, these 5 stocks account for the lion’s share of the profits as well. It can be a bit complicated, but in today’s world of Exchange Traded Funds (ETFs), it does not matter how expensive these stocks are, the ETF companies need to buy more as the price goes higher.

Certainly we have highlighted the reasons for this movement in the past and it basically comes down to “don’t fight the Fed.” Since the beginning of the coronavirus pandemic, central banks around the world have thrown trillions of dollars into the mix and have pushed interest rates to zero everywhere. So, you don’t get paid at all for your cash or bonds. Your only choice is stocks, no matter how bad they are. On that note let’s show a chart below (thanks to This chart shows the ratio of the overall stock market to the value of the economy, and we can just let the chart speak for itself. Yikes!

Now let’s take a look at the economy in the U.S. and see what we have for the month. Gross Domestic Product (GDP) came in at -32.9% versus expectations of -34.1%. Just for perspective this easily makes it the worst quarter in the history of ever. Non-farm payrolls gained 1.76 million jobs for the month compared to estimates of 1.6 million. Again, for perspective, we lost 20 million jobs in the early days of Covid and have since regained about half of those back. Finally, retail sales were up 7.5% for the month compared to estimates of 5%. It seems that consumers are still managing to spend at least on some level.

So how do we put all of this together? It speaks volumes about the old quote that “markets can remain irrational longer than you can stay solvent.” We have exited the area where the markets make no sense on any fundamental level. The sharpest recession on record is met with new all-time highs. Of course that will eventually meet a reckoning, but that could be a bit further down the road. If central banks continue to pour in unlimited money, investors will have little choice but to put it right back in the stock market. The one thing that could derail the money printing plans of the banks would be inflation, so we will leave you with a quick look at the price of gold in the past few years...