This blog will serve as follow up to our previously released Q3 Investment Themes and is intended to provide an update on what we are seeing as well as our current outlook. 


Here are the top three things we are covering in this week’s blog:

  1. The S&P 500 overcame concerns of renewed lockdowns and shaky economic data to finish a strong month in the green.
  2. While the extremely bullish economic data is now beginning to slow, some strength could remain for multiple future quarters.
  3. After such a long stretch of bullish market performance, we are now seeing some warning signs that have caused us to adopt a new All-Weather investment philosophy.

Market

Despite concerning economic data, political instability, and renewed COVID lockdowns, the S&P 500 rallied higher throughout August[1]. Following a similar trend from previous months, the market jumped in the first few weeks before giving back the gains at the midpoint. But as we’ve witnessed consistently since the 2020 crash, the dip was quickly bought and within a week the market shot higher in route to a seventh consecutive month in the green[2].

After underperforming for much of the first two quarters, Tech has regained its role as the market trend leader. With F.A.A.M.G. stocks spiking, the Nasdaq 100 closed August +4.16%[3].

With the continued rotation out of cyclical industries into tech, the Dow Jones Industrial Average to underperform the other major indexes and finished up a meager 1.22%[4]

Following the crash in March 2020, small caps outperformed the rest of the major market indices for much of the latter half of 2020 and early 2021. But since peaking in March 2021, small caps have remained range bound and failed to make a new all-time high[5].

Commodities began August in a downward spiral that only worsened as various Fed President’s made comments indicating the potential for tapering in the coming months[6]. However, the concerns faded with Fed Chair Jerome Powell’s reassurance that consideration of rate hikes remain very far into the future[7]. Overall Commodities finished the month +0.05%[8].

Similarly, gold began the month in negative territory after falling over 4.5% in the first two weeks. The drop was largely caused by resounding strength in the U.S. dollar and began to create concerns over the strength of the recent gold rally. But as concerns of tapering faded, the dollar weakened and Gold rebounded back to a nearly positive finish for the month[9].

The world index surged 2.35% as it continued its steady and consistent rally off the 2020 lows[10].

After falling heavily in Q2, the ten-year yield has steadied and held the previous gains[11].

Economy

Total Unemployment Insurance Claims fell further in August to just over 12 million as the economy continues to recover from the initial pandemic spike[12]. However, this level of claims remains well above the pre-pandemic levels.

August’s jobs report came in much worse than expectations as consumers fear another wave of COVID lockdowns may be on the cusp. Non-farm payrolls increased by just 235,000, far off the 720,000 expected. On a positive note, the unemployment rate came down slightly to 5.2% from 5.4% in the prior month. Overall, this was a very concerning report and presents concerns over what may lie ahead if additional lockdown measures are put in place[13].

Coming off the pandemic lows, US GDP surged higher on a YoY basis in Q2 to 12.18%. This massive spike in GDP provided support for the market with nearly every industry experiencing deep Quad 2 growth. While research from Hedgeye and Bloomberg does suggest a slowdown in the coming quarters, we are still expecting to see GDP remain elevated above pre-pandemic data for the next year and beyond.

YoY CPI participated in similar growth and jumped to 4.85%. Despite the Federal Reserve’s label of transitory, our third-party research expects the inflation to stick for the next 2-3 quarters[14].

US pending home sales came in at -1.77%, significantly below expectations of +0.4%[15]. Coming out of the pandemic, the real estate market recovered much quicker than many other industries[16]. As a result, real estate is now beginning to trend down while the slower to recover industries see growth.

Another concerning data point has been the crash in consumer sentiment, which feel to a ten year low of 70.3 in August[17]. With COVID beginning to cause renewed shutdowns and increasing concern over the situation overseas, fear has once again returned to the consumers. The major takeaway here is that while consumer sentiment is now below the levels seen at the bottom of March 2020, the market remains at all-time highs. As a result, seemingly small unforeseen events could cause this disconnect to correct and lead to major losses in the market.

Summary

  1. The market roiled higher throughout August as big cap tech regained its leadership role.
  2. Concerns persist with many of the prior economic tailwinds likely to flipping to headwinds, political instability across the globe, and increasing COVID lockdowns.
  3. While market participants have enjoyed a huge bull run over the last year and a half, many economic and political concerns lie in the months ahead. For this reason, we have begun shifting out Konvergent investment philosophy to an All-Weather approach that is designed to perform in all market environments.

We hope you have enjoyed getting a deeper look into our investment research and look forward to providing this to you each quarter going forward. Thank you from the entire Konvergent Team!


[1] Slide 3: SPX Continues Higher

[2] S&P 500 falls slightly Tuesday, but notches 7th-straight winning month in August (cnbc.com)

[3] Slide 4: Tech Outperforms

[4] Slide 5: Dow Underperforms

[5] Slide 6: Small Cap Rally

[6] Fed’s Eric Rosengren backs tapering in the fall but no rate hikes until job market improves (cnbc.com)

[7] Powell sees taper by the end of the year, but says there’s ‘much ground to cover’ before rate hikes (cnbc.com)

[8] Slide 7: Commodities Finish Flat

[9] Slide 8: Gold Hits Speedbump

[10] Slide 9: World Index Strong

[11] Slide 10: Ten Year Yield Holds Gains

[12] Slide 12: Total Claims

[13] Slide 13: Jobs Report

[14] Slide 14: GDP & Inflation

[15] U.S. Pending Home Sales Drop for Second Straight Month in July | Investing News | US News

[16] Slide 15: US Home Sales

[17] Slide 16: Consumer Sentiment

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