Quarterly Market Review: Q2 2020

"Nifty-Fifty" and the "Giant 5" - What's in a Name?

You may notice there is a disconnect between the world we’re living in – where COVID-19 is escalating and our nation is still struggling with economic shutdowns and significant unemployment – and the stock market, which is up 43% from its low in March, and only down 5% from all-time highs in February 2020.

You are likely wondering – How? Why?

Those are great questions. A grand majority of companies that make up the stock market are suffering consequences of COVID-19, and yet the market has been steadily climbing as if we have moved onto the COVID-19 recovery phase. Why? The market is increasingly being dominated by a group of companies dubbed the “Giant 5”: Amazon, Apple, Google, Microsoft and Facebook. These five companies have grown to play an outsized role in the markets.

The "Giant 5" is just the latest market term created to identify a particular phenomenon. Among many terms created throughout market history, some are given to groups of stocks that performed unusually well at specific times. In the 1960s and 1970s, there was a group of stocks called the “Nifty-Fifty” that did extremely well, only to significantly underperform from the mid-1970s into the early 1980s. Many of these businesses are still around today and are doing quite well – Disney, Coca-Cola and Pfizer among them. Some of the companies, however, have not done so well or have ceased to exist altogether, like Sears, Eastman Kodak and Polariod. Ironically, only two of the “Giant 5” companies (Apple and Microsoft) even existed in the 1970s.

Beginning in January 2018, large cap growth companies began significantly outperforming the broader market. That outperformance gap continued to grow through 2019 into the COVID-19 market drop. It has been these five stocks, in particular, that have lifted the entire stock market back from the lows hit in early spring.

As you’ll see in the graph below, the “Giant 5” have increased in value and now represent roughly 19.4% of the entire stock market value. This has increased from 10% just 3.5 years ago. Doubling their value relative to the rest of the stock market in a little over 3 years is noteworthy and possibly unsustainable.

It is important to note that the recent outperformance of large cap growth is not a perpetual occurrence. This trend began around July 2017, as seen below by the black line representing Large Growth below.

Statistically speaking, the degree of this divergence in returns is usually not sustained over long periods. Different companies and stocks have their time in the sun, but the timing and duration of their moments are unknowable and never perpetual.

Despite the rise of the Giant 5 (to which you could easily add Netflix and Tesla), technology stocks as a whole actually trail the total return of the S&P 500 since March 2000 and the height of the tech boom. The growth stock boom is not reflective even of its own the market segment, as gains have really been driven by only a handful of names.

What does this mean for you? The way we construct portfolios, you own index funds or funds near the index. As such, your U.S. stock holdings are benefiting from the rise of the Giant 5. We do not specifically target these five stocks individually because data shows that perpetual performance gaps do not exist. The gap will narrow, either by the underperformers catching up, or the Giant 5 losing some luster as over-hyped expectations (and prices) come down.

As you’ve likely heard me say time and time again, chasing returns leads to taking outsized risks. Our job is to give our clients the best odds of success by maintaining a properly diversified approach to investing. We never try to pick the winners – usually once it’s clear they are winners, those who jump on the bandwagon join in too late to reap any benefits, and often end up buying in when the stocks are significantly overpriced. Our portfolio construction enables you to benefit from these big names and outperformers, while preserving the long-term performance expected of the stock market as a whole.

As always, we are more than happy to answer any questions or discuss your portfolio specifically, so please never hesitate to get in touch. We are here to help!

We hope you all enjoy a happy, healthy and fun-filled summer!

Economic Indicators at a Glance

Below you’ll find a snapshot of some top-line economic indicators, followed by the Quarterly Market Review.

Data source: Trading Economics. 2020.

Market Summary Second Quarter 2020 Index Returns

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net div.]), Emerging Markets (MSCI Emerging Markets Index [net div.]), Global Real Estate (S&P Global REIT Index [net div.]), US Bond Market (Bloomberg Barclays US Aggregate Bond Index), and Global Bond Market ex US (Bloomberg Barclays Global Aggregate ex-USD Bond Index [hedged to USD]). S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2020, all rights reserved. Bloomberg Barclays data provided by Bloomberg.

World Stock Market Performance

MSCI All Country World Index with selected headlines from Q2 2020

Graph Source: MSCI ACWI Index [net div.]. MSCI data © MSCI 2020, all rights reserved.

It is not possible to invest directly in an index. Performance does not reflect the expenses associated with management of an actual portfolio.

World Asset Classes

Second Quarter 2020 Index Returns (%)

Equity markets around the globe posted positive returns in the second quarter. Looking at broad market indices, US equities outperformed non-US developed markets and emerging markets. Value stocks underperformed growth stocks, and small caps outperformed large caps. REIT indices underperformed equity market indices in both the US and non-US developed markets.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor's Index Services Group. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2020, all rights reserved. Dow Jones data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Bloomberg Barclays data provided by Bloomberg. Treasury bills © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).

U.S. Stocks

Second Quarter 2020 Index Returns

The US equity market posted positive returns for the quarter, outperforming non-US developed markets and emerging markets. Value underperformed growth in the US across large and small cap stocks. Small caps outperformed large caps in the US. REIT indices underperformed equity market indices.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Marketwide (Russell 3000 Index), Large Cap (Russell 1000 Index), Large Cap Value (Russell 1000 Value Index), Large Cap Growth (Russell 1000 Growth Index), Small Cap (Russell 2000 Index), Small Cap Value (Russell 2000 Value Index), and Small Cap Growth (Russell 2000 Growth Index). World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. Russell 3000 Index is used as the proxy for the US market. Dow Jones US Select REIT Index used as proxy for the US REIT market. Frank Russell Company is source and owner of trademarks, service marks, and copyrights related to Russell Indexes. MSCI data © MSCI 2020, all rights reserved.

Real Estate Investment Trusts (REITs)

Second Quarter 2020 Index Returns


US real estate investment trusts underperformed non-US REITs in US dollar terms during the quarter.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Number of REIT stocks and total value based on the two indices. All index returns are net of withholding tax on dividends. Total value of REIT stocks represented by Dow Jones US Select REIT Index and the S&P Global ex US REIT Index. Dow Jones US Select REIT Index used as proxy for the US market, and S&P Global ex US REIT Index used as proxy for the World ex US market. Dow Jones and S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

Select Market Performance

Second Quarter 2020 Index Returns

In US dollar terms, Australia and New Zealand recorded the highest country performance in developed markets, while the UK and Hong Kong posted the lowest returns for the quarter. In emerging markets, Argentina and Thailand recorded the highest country performance, while Qatar and Colombia posted the lowest performance.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Country performance based on respective indices in the MSCI World ex US IMI Index (for developed markets), MSCI USA IMI Index (for US), and MSCI Emerging Markets IMI Index. All returns in USD and net of withholding tax on dividends. MSCI data © MSCI 2020, all rights reserved. UAE and Qatar have been reclassified as emerging markets by MSCI, effective May 2014. Saudi Arabia and Argentina have been reclassified as emerging markets by MSCI, effective May 2019.

Fixed Income

Second Quarter 2020 Index Returns

Interest rate changes were mixed in the US Treasury fixed income market in the second quarter. The yield on the 5-Year US Treasury Note decreased by 8 basis points (bps), ending at 0.29%. The yield on the 10-year note decreased by 4 bps to 0.66%. The 30-Year US Treasury Bond yield increased by 6 bps to 1.41%.

On the short end of the curve, the 1-Month T-bill yield rose by 8 bps to 0.13%, while the 1-year T-bill yield fell by 1 bp to 0.16%. The 2-year note finished at 0.16% after a yield decrease of 7 bps.

In terms of total returns, short-term corporate bonds returned 5.59% for the quarter. Intermediate corporates returned 7.63%. The total return for short-term municipal bonds was 2.38%, while intermediate-term muni bonds returned 3.19%. General obligation bonds outperformed revenue bonds.

One basis point (bps) equals 0.01%. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Yield curve data from Federal Reserve. State and local bonds are from the S&P National AMT-Free Municipal Bond Index. AAA-AA Corporates represent the ICE BofA US Corporates, AA-AAA rated. A-BBB Corporates represent the ICE BofA US Corporates, BBB-A rated. Bloomberg Barclays data provided by Bloomberg. US long-term bonds, bills, inflation, and fixed income factor data © Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). FTSE fixed income indices © 2020 FTSE Fixed Income LLC, all rights reserved. ICE BofA index data © 2020 ICE Data Indices, LLC. S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

This report was prepared by Gregory Saliba.

Gregory Saliba

President, Taurus Capital Management

saliba@tauruscap.com

(503) 756-2972

20+ years in Corporate Finance, Debt Capital Markets and Investment Management

2010 Oregon Ethics in Business Award Recipient

Public Speaker on Risk, Behavioral Finance and Ethics

Finance Faculty Member (12+ years)

  • Willamette University, Atkinson Graduate School of Management

  • Portland State University, School of Business Administration

Extensive Community Involvement


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