Market Mondays #18

Apple's new market-cap record, K-shaped stock recovery and more...

Last week in the financial markets

· Brexit talks broke up on Friday and Barnier announced that that a deal “seems unlikely”.

· The S&P 500 marked the fastest recovery from a bear market in history.

· Apple became the first U.S. publicly traded company with a market capitalization over $2 trillion, after adding $1tn in 5 months.

· The Federal Reserve seemed more downbeat about the economy in its policy meeting than expected.

· Concerns also remained over the lack of progress on a new fiscal stimulus program.

· Flash PMI surveys show that the European rebound is slowing.

· A US housing report showed that sales of existing homes surged nearly 25% in July relative to the previous month and nearly 9% from a year earlier. 

· Airbnb made it official and filed papers for an IPO.

· The Trump administration issued an edict tightening the embargo on Huawei.

Driving forces for the week ahead

‘K-shaped’ stock recovery widens gap between winners and losers

After closing at an all-time high, ending the shortest-lived bear market in U.S. history the question that persists is how the S&P 500 has managed to recover so quickly. So far the recovery has not looked like a U, V or L but more like a K, whereby the firms at the top heap their positions while the rest see their fortunes degrade. 

“It’s one recovery for financial market investors and another recovery for everybody else,” says Joe Brusuelas, chief economist at RSM.

The staggering recovery in the job market also points to greater suffering at the bottom. While employment for people earning more than $32 per hour is already above pre coronavirus levels, the employment change for people earning less than $14 an hour is at around -20% as the Washington Post reports

The second gap is between the S&P’s companies, the likes of Apple and Amazon have advanced significantly since March while the majority of the index is still at levels where they were before. Apple, Microsoft, Amazon, Alphabet and Facebook, the top five companies in the S&P 500, account for more than a quarter of the rally since late March and each reached new highs in August as the Financial Times reports. Apple’s equity value of $2tn is now larger than the bottom third of companies in the S&P 500 combined.

According to Rob Almeida, global investment strategist for MFS Investment Management, the reason for success of the likes of Amazon and Apple is their ability to generate positive cash flows and profits, “I’d rather own an expensive asset with some level of cash flow surety going into a down market than owning something cheap with cash flow uncertainty.” 

What else we’re reading

· Carbon trading: the ‘one way’ bet for hedge funds

· Pandemic triggers wave of billion-dollar US bankruptcies

· ‘K-shaped’ stock recovery widens gap between winners and losers

· Wall Street’s record run owes a lot to flattened bond yields

· China vows continued support for Hong Kong as financial hub

· Wall Street creates $3 trillion whale in model portfolio boom

· Xi Jinping is reinventing state capitalism

This week’s key events and data releases

Tuesday: New home sales, U.S. Census Bureau

Thursday: Weekly unemployment claims, U.S. Department of Labor, Second-quarter GDP, second estimate, U.S. Bureau of Economic Analysis

Friday: BOE Bailey speaks

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