Monday Market Review June 22, 2020
Economic data continued to rebound last week from the troughs of commercial activity during lockdowns. Strength was pronounced in retail sales and industrial production, as well as carryover into the index of leading economic indicators.
U.S. and foreign equity markets gained as economic results continued to improve along with business reopenings. Bonds were little changed, although corporates rallied from additional Fed intervention. Commodities were led by a sharp rise in crude oil prices back toward more normal levels.
U.S. stocks began the week strongly, with hopes for additional government fiscal stimulus (including the resuscitation of a possible $1 tril. infrastructure bil.), further Federal Reserve intervention into corporate bond markets, and a large study showing that a common steroid therapy has been effective in treating advanced-stage Covid patients. This was tempered a bit by new Covid cases in Beijing, as well as steady increases in several U.S. states—both those that had generally reopened (like FL), as well as those still more restricted (like CA). Broadly, evidence of a bottoming and reversal upward in economic growth appeared to outweigh a growing Covid caseload, described by some as a ‘second wave’.
Foreign stocks, in standard fashion as of late, tracked U.S. equities as global sentiment continued to be closely tied to broad trends over Covid-related economic reopenings. In emerging markets, Chinese stocks were sharply higher as a resumption of economic activity outweighed signs of a new outbreak in Beijing. Commodity- and generally export-oriented nations fared best last week, which was unsurprising in keeping with broader tendencies in recent weeks. The Bank of England kept rates near zero, not moving into negative territory, but widened its bond-buying program, although there seems to be more concern overseas about eventual inflation impact than we have in the U.S.
U.S. government bonds were little changed, while investment-grade and high yield corporates each gained nearly a percent along with strength in risk assets. It was announced early last week that the Fed would purchase not only corporate bond ETF’s but now corporate bonds directly, via a pre-determined ‘basket’ of bonds. With spreads having tightened sharply from wides in March, and firms taking advantage of it through far higher debt issuance, the need for this stepped up government activity is being debated. Foreign developed markets were little changed in local terms, but lost ground due to a stronger dollar. Emerging market debt gained along with risk assets, although this was tempered a bit due to the same dollar effect.
Commodities gained broadly, with a continued recovery in risk assets and a weaker dollar. Energy led the way with sharp gains, while metals provided minimal gains and agriculture lost ground slightly. The price of crude oil rose by nearly 10% to a shade below $40/barrel, with hints of stronger demand growth as the world slowly reopens and that production cuts between Russia and Saudi Arabia appear to be sticking.
(+) Retail sales for May rebounded by 17.7% in May on a headline level, a record-breaking month and beating expectations for 8.4%. The core/control measure of retail sales, excluding the more volatile sectors of food, gasoline, and building materials, rose by 11.0%—which was twice the 5.2% expected. Several components of the headline non-core index served as the strongest contributors, such as auto sales, up 44%, and gasoline stations, up 13%. In other core areas, though, growth was also robust, seen in a nearly 200% jump in clothing/accessories, and 90% each for furniture/home furnishings and sporting goods/hobbies/books.
While these sharp rebounds in monthly data appear to be beginning, it’s important to keep in mind that monthly figures are quite volatile. For example, a terrible prior month resets the base level of activity lower. So, a rebound in activity the next month (or going from almost fully closed to reopened) will give the impression of exceptional growth. This will be an anomaly likely seen in several datasets in coming weeks, so should be discounted to some extent, although the opening activity in itself is positive.
(0) Industrial production rose 1.4% in May, which was an improvement on the prior month, but fell short of the 3.0% gain expected. The 121% increase in auto production was the primary catalyst for the headline increase, although other non-auto sectors also rose by 2.0%, including business equipment, up 6%. Utilities fell by over -2%, a segment which tends to be affected by weather as much as other factors. Capacity utilization for the month rose by 0.8% to 64.8%. Along with other manufacturing segments, this measure reflected a ‘reopening’ of sorts.
(+) The Empire manufacturing index rose by a significant 48.3 points to end June at -0.2 (barely contractionary), beating median expectations for a continued-weak -29.6 reading. Under the hood, shipments and new orders were also strong, in line with the headline number, while employment also rose a few points but remained in contraction. Prices paid rose by over 12 points to further expansionary levels, as did the measure for business conditions six months out—which rose by 27 points to a level of over 56. This surprisingly robust report echoed re-opening activity in the manufacturing segment of the economy—hoped for by many observers—but coming perhaps sooner than expected.
(+) The Philadelphia Fed manufacturing index rose by an even more substantial 70.6 points to a level of 27.5, beating expectations for a still-contractionary -21.4. Several key areas saw expansion, including shipments and new orders experiencing the sharpest recoveries while employment also gained to end at a barely-contractionary level. Prices paid also rose, as did business expectations for the next six months—by 17 points to a very optimistic level of 66.
(0/-) Housing starts in May rose by 4.3% to a seasonally-adjusted annualized rate of 974k, which fell far short of the expected rebound of 23.5%. Multi-family starts were the primary driver, up 15% over the prior month, while single-family starts barely changed. From a regional standpoint, starts in the West rose 70%, driving performance, followed by a double-digit gain in the Northeast, while those in the South fell by over -15%. Building permits rose 14.4% for the month to a healthier seasonally-adjusted annualized 1.220 mil., which also fell short, to a lesser degree, compared to expectations calling for a 16.8% increase. Multi-family led here as well, up 19%, surpassing single-family’s 12% gain. By region, activity in the Northeast was up over 80%, with other regions seeing positive permit gains to a lesser degree.
(+) The NAHB homebuilder index rose by the largest monthly amount in history, 21 points, to 58 for June, beating expectations for a 45 reading. Current sales, futures sales, and prospective buyer traffic all gained to a similar degree. Regionally, sentiment in the Northeast rose by over 30 points, followed by the other three quadrants with gains around 20 points each.
(+) The Conference Board’s Index of Leading Economic Indicators for May experienced a gain of 2.8%, which reversed a trend of consecutive high-single digit declines. As noted by the Conference Board, two-thirds of the improvement was a stabilization in jobless claims, while labor, building permits and stock market also provided a tailwind—other segments remained sharply negative. While May showed promise, the indicators for the quarter at large continue to look recessionary, which should be of no surprise. Over the past six months, the LEI has fallen by an annualized -20% rate, compared to a flattish result for the prior six-month period. The coincident indicator for May rose by 1.1%, while the lagging economic indicator fell by -1.9%. All of these figures reiterate current conditions, with perhaps some green shoots down the road.
Source: The Conference Board. Shaded areas represent recessions as determined by the NBER Business Cycle Dating Committee.
(-) Initial jobless claims for the Jun. 13 ending week fell by -58k to 1.508 mil., surpassing expectations calling for 1.290 mil. Continuing claims for the Jun. 6 week fell by -62k to 20.544 mil., which was also higher than the 19.850 mil. expected. Initial claims were mixed by state, with dramatic movements in both directions, which may be based on processing constraints and filing schedules as much as anything else. Jobless claim levels remain poor, with a substantial fraction of American workers having been displaced.
Have a good week.
Ryan M. Long, CFA
Director of Investments
FocusPoint Solutions, Inc.
Sources: FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Citigroup, Deutsche Bank, FactSet, Financial Times, First Trust, Goldman Sachs, Invesco, JPMorgan Asset Management, Marketfield Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, PIMCO, Standard & Poor’s, StockCharts.com, The Conference Board, Thomson Reuters, T. Rowe Price, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wall Street Journal, The Washington Post. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. FocusPoint Solutions, Inc. is a registered investment advisor.
Notes key: (+) positive/encouraging development, (0) neutral/inconclusive/no net effect, (-) negative/discouraging development.