Markets Continue Upward Trend
August was another positive month for the S&P 500, as markets brushed aside COVID-19 concerns and took comfort in accommodative policies from the Federal Reserve. The 3.0% gain was the seventh consecutive positive month for the index, pushing the year-to-date return to 21.6%.
What Worked and What Didn't Work
During the month, the surge in COVID-19 cases caused some economic disruption and even led to a modest 3% market pullback, although investors were quick to buy the dip. Investors are encouraged by the likely avoidance of further shutdowns and by Federal Reserve Chairman Jay Powell’s pledge to slowly wind-down bond purchasing and to keep interest rates low for the near future.
High-growth stocks, especially mega-capitalization, technology-focused stocks, continued to benefit from the low interest rate backdrop. The five largest positions in the S&P 500 (Apple, Microsoft, Google/Alphabet, Amazon, and Facebook) account for nearly 23% of the entire index and gained an average of 5.8% during August. Conversely, areas of steadier growth and more average valuation lagged. Although Consumer Staples, Healthcare and Real Estate are expected to see their earnings grow by an average of 15% this year (Factset Research), the sectors underperformed in August, producing an average return of 2.2%.
What We're Watching
Investors appear accustomed to the Federal Reserve’s monetary stance, and the U.S. has shown the ability to live with the COVID-19 virus. Assuming no major changes in either of these areas, the most significant upcoming economic catalysts will likely be the passage of the U.S. budget and the infrastructure bill. Currently, the market is anticipating tax increases on certain segments of society as well as a large increase in government spending. This combination has the potential to boost economic growth over the coming years.
As we move into fall, we continue to maintain a positive stance toward the stock market. While a correction is long overdue, and the massive amount of government economic spending will eventually end, the support looks likely to persist into 2022. We will look to be buyers on market pullbacks, if and when they occur.
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Important Disclosures: Past Performance is no guarantee of future results. All investments carry some level of risk. The S&P 500 Index is an unmanaged, market capitalization weighted index of 500 common stocks widely regarded to be representative of the US market in general. Russell 2000® Index (U.S. Small Caps): Measures the performance of the 2,000 smallest companies in the Russell 3000®Index, which represent approximately 10% of the total market capitalization of the Russell 3000® Index. Russell Midcap® Index: Measures the performance of the 800 smallest companies of the Russell 1000® Index, which represents approximately 36% of the total capitalization of the Russell 1000® Index which is a mid‐cap index. MSCI EAFE Index: Measures the equity market performance of developed markets outside of the U.S. & Canada. MSCI EM Index: Captures large and mid cap representation across 24 Emerging Markets countries and covers approximately 85% of the free float-adjusted market capitalization in each country. Barclays Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. Indices are unmanaged and direct investment is not possible. The opinions expressed are those of the author and not necessarily those of Robert W. Baird & Co. Incorporated.