| Tuesday, September 01, 2020 Headlines 1. US markets rally into September 2. Tesla announces a $5 billion share offering 3. Global manufacturing roundup 4. Market weight vs. equal weight 5. Small caps struggle to keep up Markets Closed
 Image courtesy GettyImages/MarioGuti
Markets Today U.S. equity markets charged into September posting strong gains across the major indexes, history be damned. It was a broad-based rally that may have been ignited by better-than-expected manufacturing reports out of most major global economies (full breakdown, below). Or, investors who have been enjoying the best five-month rally in history want to keep the party going by sticking with the giant stocks that brought us here.
The S&P 500 is up five months in a row and has climbed 35.4% over this period, the best ever. The previous best was 34.3% off the 2009 lows, and the S&P 500 went on to add another 8.7% six months later. Past results don't guarantee anything.
The manufacturing recovery appears very real in most economies, but the threat of a resurgence in the virus is just as ominous. New cases are appearing at dangerously elevated levels across the U.S. Midwest, Spain, Brazil, and Russia, among other places. The more than 25 million cases, and 848,000 fatalities thus far, are stark reminders of how serious this has been. The economic damage has also been devastating. Another wave could be debilitating.  Chart courtesy KPMG/WorldBank [NEW READER SURVEY: We are running another two-week survey of our U.S.-based readers to gauge your sentiment and see what moves, if any, you have been making with your money given the market recovery and current economic conditions. We'll share the results, as always, and we thank you for your time and participation.]
Headlines:
 Chart courtesy Schwab Research What the Big Stocks' Performance Is Hiding We've written endlessly about the outperformance of the mega-cap tech stocks and how they have driven the overall performance of the S&P 500 and the Nasdaq. That concentration of market cap can be a powerful force on the way up and on the way down. We've obviously been in an uptrend for the past five months.
But while the S&P 500 Index has made new all-time highs in August, most stocks have not. The equal-weighted S&P 500 Index has not made a new high since June 8, with fewer stocks participating in the gains. As Jeff Kleintop, Schwab's Chief Global Investment Strategist points out, increasing dependence on a small number of big stocks for overall performance can be a sign of vulnerability. Kleintop notes that whenever the market-cap-weighted S&P 500 index and the equal-weighted S&P 500 index diverged over the past 30 years, the gap closed quickly as the market-cap-weighted index retreated. That happens when mutual fund and index fund managers have to rebalance their portfolios so they are not in overweight a particular sector. Right about now, most fund managers are loaded up with tech stocks.
It may not happen this time, but 30 years is a pretty good sample size.
What About International? At first glance, U.S. stocks appear to be crushing international stocks four months into the recovery. But, as Kleintop notes, that is only true for the capitalization-weighted indexes. Since the new cycle began in April when economic activity bottomed, international stocks have been outperforming U.S. stocks as measured by the equal-weighted indexes, below.
It's a little like saying that if you take out all the best players on a team, other teams can beat it. It's true, but it's also a lesson in global diversification. There are returns outside of the land of the giants, and when those giants stumble, look out below.  Chart courtesy Schwab Research Small Cap Check-In One of our smart readers (we have so many...) wrote in asking for more coverage of small cap stocks, and to list them with our leaderboards at the top of the newsletter. We'll work on the latter. But he did remind us to look more broadly at the stock market, which is always good to do.
Small caps, as measured by the Russell 2000, which includes U.S. companies with market caps of less than $1 billion, have yet to break even for 2020. We've seen a lot of small cap stocks like Zoom turn into mega-cap stocks, but the index, as a whole, is still suppressed. The Russell 1000, which includes the 1,000 largest cap companies in the U.S., has obviously performed better, as size has mattered in this cycle. But neither compare with the Nasdaq 100, which includes not just the biggest tech companies, but other 2020 winners like Costco (COST), DollarTree (DLTR), and of course, Zoom Video Communications.  Chart courtesy YCharts
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(chart courtesy YCHARTS)  Shares of Walmart are up by over 6% following the announcement of the launch date for Walmart+, the retailer's new membership program and Amazon Prime rival. Netflix's stock price rose by 5% after the streaming platform announced that some of its most popular programs will be available for free in an effort to attract new subscribers.  Shares of Mylan are down by over 5% after the pharmaceuticals company received a warning from the FDA for not ensuring that key drug ingredients made at one of its plants in Pashamylaram, India, weren't contaminated. The stock price of another pharmaceuticals company, Regeneron, fell by nearly 4.5% amid an announcement that its rheumatoid arthritis drug Kevzara failed as a potential COVID-19 treatment. Word of the Day Secondary OfferingA secondary offering is the sale of new or closely held shares by a company that has already made an initial public offering (IPO). There are two types of secondary offerings. A non-dilutive secondary offering is a sale of securities in which one or more major stockholders in a company sell all or a large portion of their holdings. The proceeds from this sale are paid to the stockholders that sell their shares. Meanwhile, a dilutive secondary offering involves creating new shares and offering them for public sale.  Photo credit Universal History Archive
Today in History Sept 1, 1932: How bad can it get? In the depths of the Depression, Wall Street took its own pulse and detected only faint signs of life. In the bond market, 19.4% of all debt issued by foreign governments and corporations had defaulted, along with 14% of real-estate debt, 7.2% of all U.S. industrial bonds, 5.4% of utility debt, 3.5% of railroad issues, and 1.8% of all municipal bonds. The Dow Jones Industrial Average was at 73.67, down from 381.17 just three years earlier—an 80.7% loss.
Barrie A. Wigmore, The Crash and Its Aftermath: A History of Securities Markets in the United States, 1929–1933 (Greenwood Press, Westport, Ct., 1985).
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Tuesday, September 1, 2020
Land of the Giants
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