It has been a few weeks since my last update but as volatility has returned in a major way this week I thought another update was in order. This second round of volatility got me thinking of sequels. So I will break down this week's news with quotes from arguably the greatest sequel of all time, the Godfather Part II.
Good health is the most important thing. More than success, more than money, more than power. -Hyman Roth
Reopening doesn't mean the virus is gone. Precaution is still necessary. Infections nationwide have risen 65 percent over the past two weeks, including in several states that were among the first to reopen. By Saturday evening, more than 41,000 cases of the coronavirus had been announced across the U.S., including single-day records in Nevada, South Carolina and Florida.
Yeah, but only the rich guys... The little guys got knocked off and all their estates went to the emperors -Frank Pentangeli
Is the stock market really reflecting a rebound in the economy? Maybe not. The S&P 500 is a market cap-weighted index, meaning the more valuable your company the larger percentage of the index you are. The top five stocks (Facebook, Amazon, Google, Apple, Microsoft) now represent 21% of the index (the last time this happened was 1999) and thus account for 21% of the returns. In an equal weighted S&P 500 index these stocks have a weight of 1% (they’re just 5 out of 500 stocks). SPY is the market weighted index ETF it is down 6% for the year, where RSP the equal weighted index ETF is down 16% – remember, same stocks. It’s just that SPY is heavily weighted toward those 5 tech names and RSP treats each stock in the index equally. What this tells you is that maybe only a very small percentage of the economy is recovering. The market can continue to shake off bad news if money continues to flow into the handful of stocks that have led it higher. This gives the impression the stock market is disconnected from reality, but it's not, it's reflecting the haves getting richer and the have-nots losing ground.
But it occurred to me, the soldiers are paid to fight. The rebels aren't.-Michael Corleone
Does social unrest reverberate through the markets? Normally no, this time certainly feels different. Here in my neighborhood some stores are still boarded up. This week I saw police standing guard in front of statues in the Central Park Mall. We can't erase our history but we can use this unrest as an inflection point to make things better going forward. The good news is most Americans think that will happen. A recent NY Times poll found that 61% of the people polled felt hopeful about the state of our country and more than 70% thought the economy will have improved by next year.
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