A historic week for U.S. markets
August 21, 2020 by The Q.ai Team
What’s more fun to watch: last night’s hockey game between the Capitals and the Islanders or the stock market? This week has been rich with investing news – broken records, (another) tech-led rally, powerful earnings from retail and a historic $2 trillion valuation. There’s a lot to cover, so let’s tuck in.
TFW you finish reading this newsletter
Biggest headlines of the week
- Apple is the first U.S. company to reach a $2 trillion valuation. While Apple may not be everyone’s fave tech giant at the moment (we got u, Fortnite), you can’t not give some props for not only being the first U.S. company to cross the $2 trillion threshold, but to have also added $1 trillion over the last 21 weeks. What is even more impressive is that the stock dipped below $1 trillion Mid-March, so the company was already playing at a disadvantage. This must have been how Michael Jordan felt after he scored 38 points and sank the winning bucket during his “Flu Game.” Read more.
- The S&P 500 finally crossed over to its all-time high.
And then it inched further the very next day, eclipsing its own record. The Nasdaq also hit a few records of its own – but that’s somewhat less exciting and more expected, as the Nasdaq is chock-full of tech stocks and tech has been singlehandedly carrying the U.S. stock market since Covid-19. Read more.
- Unemployment was higher than estimated, coming in at 1.106 million. Keep in mind that last week was the first time since March that the number of jobless claims were under 1 million, so concerns over whether the economy is going to recover at a snail’s pace has definitely been reignited. Read more.
Retail, u good bro?
Shoppers, circa anytime before March 2020
Some big retailers have reported explosive earnings, most notably Walmart which had reported a 97% growth in e-commerce sales. Other companies to have reported strong second quarter earnings as well as a strong performances in the stock market include Target, Lowe’s and Home Depot.
There is a common denominator with these retailers: all have remained open throughout the pandemic because they have been deemed essential.
As a sector, retail is nowhere close to where it was pre-Covid. All of the brick and mortar locations for clothing and apparel were shuttered for months. And it has affected sales to a damaging – and sometimes irreparable – level. In fact, 26 major retailers have already filed for bankruptcy this year (Muji?!
Why does this matter
The way we gauge stuff is fascinating. Investors measure the health of the markets by watching the three major indexes. Americans measure how close Spring is by watching a groundhog react to its shadow. And financial analysts look at retail sales to determine the health of the consumer, which in turn tells us a deeper story about the health of the economy.
In Q2, U.S. e-commerce grew 44.5%, the biggest quarterly growth in over 20 years. We’re ultimately going to see a change in the way retail operates. Retailers with a less strong presence in the e-commerce space will likely be weeded out by the one-stop-shops that have the infrastructure in place for pick-up, contactless delivery and curbside pickup. If a retailer don’t already have this option available, it is already behind.
What “ETF” stands for (also, what an ETF is )
ETFs trade like stocks and carry many of the freedoms of stock market investing, as well as a few risks. However, ETFs are more cost-effective and liquid than many other types of funds, and usually lower risk than picking securities by hand.
Investment funds are basically portfolios you don’t build yourself. It pools capital from many investors into a single pot with the purpose of allowing each person to hold a stake in a given set of securities (i.e. stocks, bonds, options), rather than purchase the individual securities on its own.
One way to illustrate an investment fund is to think about making a lasagna. First, you put down the noodles, and then your meat or vegetable filling, and then your tomato sauce, and then your cheese. Each of these ingredients represents a security. Once the lasagna is baked and served, every person at the table gets a little bit of everything. In the same way, an investment fund “stacks” various securities on top of each other, and then each investor purchases a piece.
In order to understand ETFs, you need to first know what an index fund is.
All you need to know about Index Funds
- Index Funds are some of the most diversified, low-risk investment vehicles available
- It offers steady returns, either through dividends or by producing interest
- It allows investors to bet on long-term market trends, which are more profitable in the long run than most handpicked portfolios
Index funds hold a unique place in the market as “baskets” that contain most or all of the securities in a specified index. You can’t invest in an index itself, but you can invest in an index fund – which models itself after an index. There are three indexes that are closely followed: S&P 500, Dow Jones Industrial Average, and Nasdaq Composite.
The S&P 500 is an index comprised of stocks from 500 companies – or 80% of the entire U.S. stock market. Many index funds track the performance of the S&P 500 to determine which securities the fund should buy and in what amounts.
The Nasdaq Composite is known for its tech-heavy representation, which has been highly regarded this year due to all but the tech sector struggling greatly from the pandemic. The Composite is made up of 2,500 companies, but the top 100 is mostly comprised of tech.
Dow Jones Industrial Average
The Dow Jones Industrial Average is made up of 30 large U.S. companies – in other words, those stocks are “blue chip.” Because it has so few companies in comparison to other indexes, many feel that it doesn’t fully represent the entire U.S. stock market.
Index funds make it easy and affordable for individual investors to purchase shares of hundreds or even thousands of companies without hand-picking each security. Furthermore, index funds are a good way to buy a representative sample of an index without spending the exorbitant amount of money required to buy one share of every stock within an index.
Warren Buffet himself, among many other famous investors, recommends index funds on this very basis. He has stated that it makes more sense to purchase a slice of a fund holding every security, rather than a slice of every security within an index.
Okay, but what about ETFs?
An Exchange-Traded Fund (ETF) is an exchange-listed security that tracks an index fund, such as the S&P 500 or the Nasdaq. When you purchase a share of an ETF, you’re not picking out the securities you wish to buy. Instead, you decide which asset class(es), sector(s), or indices you’d like to invest. Some ETFs also follow particular strategies, such as growth or value investing, by choosing a sampling of an index to follow.
ETFs can own thousands of stocks in a single fund, or they can limit to a few dozen within a given sector or industry. It’s also listed on exchanges and can be traded intraday, like stocks. This can be both a blessing and a curse for many investors.
For instance, incredibly risk-adverse investors who notice shares of their ETF slipping with a market crash can sell before the day’s close. However, the ability to access the market at any time leads to trading on impulse and emotion, rather than attempting to weather the storm.
Benefits of ETFs
- Tends to be more cost-effective and liquid than many other funds on the market due to different capital gains regulations
- Offers more choices to their investors when it comes to trading shares, since buying and selling is not limited to a set time in the trading day
- Smaller or no investment minimums than many types of funds
- Typically costs less tax-wise in a given year than many mutual funds
- Often carries a smaller expense ratio due to many ETFs being passively managed, which leads to fewer management fees
Main Types of ETFs
There are several types of ETFs on the market with each based around different goals, such as:
- Turning a profit through capital gains
- Supplying dividends to investors
- Hedging against various risks in investors’ portfolios
A few of the most common ETFs include:
- Bond ETFs focus on investing in various types of bonds across or within certain sectors
- Industry ETFs track a stated industry – financial, technology, etc.
- Currency ETFs put their funds into foreign (non-USD, for our purposes) currencies
- Commodity ETFs invest in various physical commodities, such as gold or oil
Downsides of ETFs
Not every ETF is profitable. Because they can list on exchanges, they have to meet certain standards – but management fees and high expense ratios can eat into an investor’s profits.
Additionally, investing in actively managed ETFs, in which the portfolio managers handpick securities to buy and sell throughout the day, tend to cost more overall and are not guaranteed to generate gains over passive ETFs. This is partially the result of higher expense ratios as well as the fact that they are more susceptible to human judgment and impulse.
The Bottom Line?
Investing in ETFs are less risky than individual stocks because the fund is made up of several of them. Just think about a diversified portfolio built by experts and designed to reflect the performance of the U.S. stock market’s biggest players. That is essentially what the S&P 500 and Nasdaq represents, and that is why it is used to model many different ETFs.
Steve Jobs was a visionary entrepreneur who once was fired from the now-$2 trillion company he founded before returning 11 years later. This guy is a legend for a reason. Just listen to the way he talks about Apple in 1997, a time when no one was betting on its success.
“I sold my stock before I got the call from the board that they wanted me to come in and shephard Apple for this period. And that was unfortunate, I wish the call had come a week earlier, but I am not a mind reader so I didn’t know.” ¯\_(ツ)_/¯