Monday Market Review August 3, 2020
Economic data for the week included the Federal Reserve keeping monetary policy unchanged and accommodative, GDP for the 2nd quarter came in showing historical weakness as expected, jobless claims remained elevated, while housing data showed signs of life with building activity picking up and prices steady due to tight market inventory.
U.S. equity markets gained, while foreign stocks experienced mixed results, as returns were largely sector-dependent. Bonds gained as interest rates ticked downward, especially outside of the U.S. as the dollar declined last week. Commodities were mixed, with energy down and metals higher.
U.S. stocks generally gained last week upon decent earnings news and an accommodative Fed. By sector, technology stocks gained up nearly 5%, while communications services and consumer discretionary stocks also returned positively. Strong earnings reports from the largest FANG firms have helped to drive the Nasdaq to market leadership during the Covid lockdowns. Energy and materials, on the other hand, lost several percent each with continued questions over profitability from large integrated oil companies.
Earnings for Q2 continue to roll in for U.S. companies, with nearly two-thirds of the S&P now having reported. The year-over-year number, which remains so large that a few percent here nor there makes little difference, shows a decline of -36% (surpassed only by the -69% drop in Q4 of 2008). Interestingly, though, nearly 85% of firms so far have reported a positive earnings surprise for the quarter, which attests to the extremely negative expectations, and would also be a record for a single quarter if this number stands for the entire S&P. The largest surprises surfaced in industrials and materials, while energy experienced continued disappointment. For the first time in a while, firms with over 50% foreign revenue exposure lagged slightly less than more domestically-oriented firms based on earnings, but those with foreign exposure suffered deeper revenue declines.
Executives from Amazon, Alphabet/Google, Apple, and Facebook (Microsoft was interestingly absent) testified before the House antitrust subcommittee last week, as legislators delved into the possible further regulation of online activities, as well as threatened potential forced corporate breakups. There are naturally some conflicting issues here. At the very least, the hearing may help clear up a cloud that’s been hanging over the future of these companies in recent years. As we’ve discussed before, anti-trust regulation has been caught between two key impacts in recent decades: on competitors vs. consumers. While competitors have complained about Amazon’s market dominance, network pricing power, for example, consumers have no doubt benefited from lower prices such scale provides. Particularly during the pandemic, consumers have been reliant on these big tech/consumer firms more than ever, which raises political fears of their growing economic power.
A key market focus has moved to the potential second economic relief package from Congress. While the first act was known as CARES, this would carry the name HEALS. While the political bar was higher for this package than the first edition, both Republicans and Democrats have agreed in principle on the need for further government aid—again, on the order of another $1+ trillion. Congressional deals being made at the last minute are common, and part of the negotiation process, and can be made retroactive (rendering the Jul. 31 deadline for some benefits less critical). Overall, market concerns are focused on both the House and Senate departing for their August recess with no clear deal in place. A key sticking point is the $600 ‘extra’ weekly unemployment insurance payment, which some argue is too high and a disincentive for seeking work.
Foreign stocks generally lost ground in developed markets, while emerging market regions were mixed to slightly positive on net. Weaker earnings were a key catalyst for Europe, especially in key sectors autos and financials, along with rising Covid cases in some regions, which was the case in Japan as well. In emerging regions, gains in Asia, notably Taiwan and South Korea, outweighed weakness in commodity-sensitive Russia, as well as Turkey, where markets fell -10% due to concerns over levels of foreign exchange reserves used to sustain the domestic lira currency. The Covid pandemic has been negative for emerging market growth generally, especially outside of the faster-recovering Asian region, but remains country-by-country dependent, and some chinks in the armor have been exposed.
U.S. bonds gained last week as interest rates ticked lower across the curve, with the 10-year U.S. treasury note reaching close to a half-percent again, in keeping with the uncertain outlook and seeming Fed commitment to low rates for longer. Credit performed slightly better on the investment-grade side, and especially in high yield. Foreign bonds earned positive returns as the U.S. dollar declined again last week by nearly a percent. Again, this has some pundits calling for the ‘collapse of the dollar’, although this has been due to strength in the euro and British pound, since currency movements are always a two-way street.
Commodities were mixed last week, despite the bullish influence of a weaker dollar. Precious metals and industrial metals experienced positive weeks, while energy declined. The price of crude oil fell by over -2% to just over $40/barrel, with a deeper decline in natural gas. While inventories have fallen a bit, along with supply cuts, a tempered outlook over the rest of the year has kept demand expectations contained. In these situations, there is no overwhelming catalyst to move prices significantly in one direction or the other over the last two months.
(0) The late July FOMC meeting didn’t offer surprises, nor did the press conference afterward. Questions focused on the continued strength of the Fed’s tools in this severe downturn, which it reiterated were sufficient to provide stimulation to the economy. There is only so much the Fed can do via monetary policy, though, which is why the fiscal packages from Congress remain so important in helping bridge the gap to a post-Covid world.
(-) Expected to be horrendous, the advance GDP figure for Q2 came in at an annualized -32.9%, which was slightly better than the -34.5% expected in the median forecast, and also better than the -40% or -50% estimates thrown out earlier in the quarter. Interestingly, the Atlanta Fed’s GDPNow estimate was fairly close, at -32.1%, while the New York Fed’s GDP Nowcast was a little too optimistic at -14.3%.
Regardless of how it’s viewed, it was the worst quarterly result since World War II. Lockdowns in certain segments and social distancing to combat Covid were the obvious causes, as personal consumption fell -35%, while business fixed investment also fell by -27%, and residential investment by -39%. There was also a degree of inventory drag that may help a bit in Q3 if reversals occur, as is typical. The magnitude of the downturn is so dramatic that the intra-sector details are less important for this particular quarter. Insofar as inflation is concerned, the quarter-over-quarter annualized rate of change for the core PCE index was -1.1%, which was about as expected.
What’s next? The Fed put it best, in noting that future economic conditions are Covid-dependent. In looking at estimates for Q3, the Atlanta Fed tool is predicting an annualized growth rate of 11.9%, while the New York Fed early results call for 16.9%. Estimates from other firms range dramatically (including over 20%), with results dependent on the path of reopenings that have recently been hampered by virus flare-ups in newer regions. ‘Growth’ is relative, though, as Q2’s extremely pared-back activity should make any improvement in Q3 at all potentially look dramatic. Overall levels of longer-term growth over the next year or longer remain very much in flux.
(+) Durable goods orders for June rose by 7.3%, beating the median forecast of 6.9% slightly; however, the large increase was due to strength in the choppy transportation category, which jumped 20% due to higher motor vehicle/part orders. Aside from that component, orders ex-transports rose by 3.3%, with leadership from metals, machinery, and electrical equipment. Core capital goods orders rose by an identical 3.3%, beating expectations of a 2.2% increase. Core capital goods shipments rose a similar 3.4%, also beating the median forecast estimate of 2.4%.
(0) Personal income in June fell by -1.1%, which was twice the -0.6% decline expected, but was muddled by offsetting changes in government benefit and unemployment insurance payments. Personal spending was up 5.6%, a bit ahead of the forecasted 5.2% figure, on top of the sharp gain in May. The influence of these two components elevated the savings rate by over 5% to 19.0% for June. For the last several months, these two figures have been sharply influenced by the massive government stimulus payments and enhanced unemployment insurance, while spending has been sporadic and concentrated on online and essentials, such as food. The PCE price index rose 0.4% on a headline level for the month, and 0.2% for core, which was largely as expected. Year-over-year, the increases in headline and core PCE were a rounded 0.8% and 0.9%, respectively—far below Fed long-term targets.
(0/-) The S&P/Case-Shiller home price index ticked up by a few hundredths of a percent, rounded to essentially flat for May, falling short of expectations calling for a 0.3% gain. For the single month, several Sun Belt cities saw around half-percent gains, including Phoenix and Tampa, while Minneapolis and San Francisco fell by at least a half-percent. Year-over-year, the national index declined by two-tenths to 3.7%, which remains fairly robust.
(+) Pending home sales for June rose 16.6%, beating the median forecast calling for 15.0%. Every region experienced a gain, with those in the Northeast leading the way, up nearly 55%; the other three came in within a few tenths of 12%. Year-over-year, pending sales reversed course from a decline to a 13% increase on a non-seasonally-adjusted basis. As usual, pending sales trends may translate to existing home sales in coming months.
(+) The advance June trade balance deficit contracted by $4.6 bil. to -$70.6 bil., narrower than the -$75.4 bil. assumed by consensus. Trade amounts rose overall, as economies saw reopening activity, with exports of goods outpacing imported goods by over $4 bil.
(-) The Conference Board index of consumer confidence for July fell by -5.7 points to 92.6, below the 95.0 level expected by consensus. Although assessments of present economic conditions rose by nearly 8 points, expectations for the future declined by -15 points, which brought down the broader index. Encouragingly, the labor differential also improved by several points, which implied stronger job market conditions.
(-) The final July Univ. of Michigan consumer sentiment index report showed a drop of -0.7 of a point to 72.5, just below the 72.9 expected. Respondent opinions of current conditions fell by just over a point, while expectations for the future declined by a few tenths. Inflation expectations for the coming year fell a tenth of a percent to a still-elevated 3.0%, while those for the next 5-10 years also fell by a tenth to 2.6%.
(-) Initial jobless claims for the Jul. 25 ending week ticked up by 12k to 1.434 mil., just below the 1.445 mil. level expected; however, when seasonality adjustments were removed to obtain the ‘real’ figures, claims fell by -171k. Continuing claims for the Jul. 18 week rose by a sharp 867k to 17.018 mil., above the 16.200 mil. consensus forecast. Pinpoint accuracy of these figures has been challenging, due to summer seasonality effects, as well as the far larger impacts of state claims processing backlogs (noted in the news frequently). Initial claims actually fell in some of the recently hard-hit states, such as CA and FL, but rose in other states in no clear pattern and likely impacted by administrative filing schedules. The long story-short is that claims remain elevated, in keeping with continued pared-back economic activity. The next sign to be watched for is improvement in these numbers.
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.