Monday Market Review July 6, 2020
On a shortened holiday week, economic data included sharp improvement in manufacturing, as well as in the June employment situation report. Housing and consumer confidence also showed promise, as a variety of data points appear to be rebounding from extremely low levels.
Global equity markets gained, with stronger economic news; U.S. stocks outperformed those abroad. Bonds were mixed to higher as interest rates were little changed, but credit outperformed. Commodities rose broadly, including increases in the prices of crude oil and natural gas.
U.S. stocks fared better last week as economic data showed improvement, in addition to an apparent willingness to proceed with further stimulus, and a potential extension of the PPP loan program until August (there is still substantial money left in the bucket). Despite continued reports of increasing Covid cases in reopened states in the Sun Belt over the past two weeks, positive results concerning further vaccine development also seemed to help boost market sentiment, which included a brief new record high for the Nasdaq index. Every sector performed positively last week, led by the diverse group of materials, consumer discretionary, and communications services (notably video gaming and steaming video); while financials and energy lagged with smaller gains. Real estate also experienced solid gains for the week.
Foreign stocks also fared positively last week, but to a lesser degree than in the U.S., with Europe and emerging markets leading, and Japan lagging with negative results. European results, as in the U.S. recently, were led by stronger-than-expected manufacturing PMI, retail sales, and employment results. Results were mixed by region, but economically-sensitive groups such as peripheral Europe, China, Brazil, and South Africa experienced the strongest weeks, in keeping with broader positive sentiment. Generally, the mood continued to follow the week-to-week results from Covid infection rates and economic data (especially the pace of reopenings and improvement).
U.S. bonds gained a bit of ground, led by contraction of spreads in corporate credit, with high yield and bank loans performing best, with returns well over a percent. Foreign developed market bonds were generally flat, while emerging markets fared well, in keeping with other risk assets.
Commodities gained across the board, with the strongest results from energy and agriculture. The price of crude oil rose 5% higher to just over $40/barrel, while natural gas rose over 12%.
(+) The ISM manufacturing index rose by 9.5 points in June back to an expansionary level of 52.6, beating expectations calling for a less dramatic increase to a more neutral 49.8. In fact, this was the second highest monthly improvement on record. Sharp gains were seen in the categories of new orders, production, prices paid, and employment—the first two of which moved back into expansion. Several of these achieved monthly records in terms of recovery magnitude. Supplier deliveries declined by -11 points but remained in expansion. This report was reflective of broader resumption of economic activity nationwide on the manufacturing side.
(-) Construction spending for May declined by -2.1%, in contrast to expectations for 1.0% increase, in addition to downward revisions for several prior months. For May, private construction declined by several percentage points, mostly due to a drop in private residential, while public spending gained several percent.
(-/0) The May trade balance widened a bit further into deficit, by -$5.2 bil. to -$54.6 bil., slightly wider than the -$53.2 bil. expected. Imports declined by nearly -1%, while exports fell by over -4% (in goods generally, but mostly a -35% drop in petroleum exports) to account for the difference.
(0/-) The Case-Shiller Home Price Index for April showed an increase of 0.3%, but fell short of the expected 0.5%. Prices rose in over three-quarters of the 20 cities in the index, led by Cleveland, Phoenix, and Minneapolis—each up over 1.0%. Portland and Seattle lagged with minor declines for the month. Year-over-year, the index has ticked up a tenth to 4.0%, which remains strong on an inflation-adjusted basis.
(+) Pending home sales spiked 44.3% higher in May, beating expectations for a 19.3% gain, and raising expectations for higher existing home sales during the next several months. Regionally, pending sales in the West gained over 55% to lead, but all four quadrants were up significantly. Year-over-year pending sales improved to -10% from -35% the prior month. Pending data is probably not as useful of a figure under normal conditions, but helps provide a gauge of the erosion and recovery from Covid lockdowns to some extent.
(+) The preliminary June Conference Board index of consumer confidence increased by a strong 12.2 points to 98.1, beating expectations calling for 91.5. The improvement was primarily due to a 17-point gain in assessments of present economic conditions, although expectations for the future also improved, as did the labor differential, which is an indicator of how easy jobs are to find. This reflects the sentiment on the ground with reopening activity occurring nationwide, but likely didn’t capture the surge in new Covid cases over the last two weeks.
(+) The ADP private employment report for June showed an increase of 2.369 mil. jobs, but falling short of expectations calling for 2.900 mil.; on the other hand, May’s figure was revised upward substantially (by over 5.8 mil.). Services jobs rose 1.912 mil., with the strongest improvement in leisure/hospitality, while goods-producing jobs rose by 457k, of which construction jobs accounted for nearly 90%. The ADP result doesn’t always correlate well with the official government jobs number, but anecdotal observations in the report noted underlying strength in small business hiring.
(-) Initial jobless claims for the Jun. 27 ending week fell by -55k to 1.427 mil., higher than expectations calling for 1.350 mil. Continuing claims for the Jun. 20 week rose by 59k to 19.290 mil., above the 19.000 mil. level expected. Claims were mixed in terms of increases/decreases across the country by state, with no clear pattern based on other reopening trends. State backlogs appear to be easing to some degree, but the data remains not completely representative due to differences in ‘layoff’ definitions.
(+) The June employment situation came in far better than expected, piggybacking on May’s report, which reflect reopenings across the U.S. However, there continue to be questions about precision of the data, with workers claiming that they’re either ‘unemployed’ or just ‘furloughed’, based on a variety of factors, not to mention complications about how employers classify workers in order to qualify for government stimulus assistance. These issues may never be fully rectified, but the best that can be done is reviewing the ‘rate of change’ in employment data, in looking for improvement.
Nonfarm payrolls saw a gain of 4.800 mil. jobs, beating the median expectation of 3.230 mil., and representing the second straight month of surprising solid results. Job gains were strongest by reopenings in previously-closed segments, such as leisure/hospitality and retail (accounting for over half of the increase), although healthcare and manufacturing jobs also rose. Government jobs have yet to recover officially.
The unemployment rate improved by -2.2% to 11.1%, which was better than the 12.5% level expected, and set the number of unemployed persons at 17.8 million (still up 12.0 million from February). The data has been affected by the definitional issues noted earlier, which resulted in some misclassifications in the prior month’s survey. The U-6 underemployment rate also fell by over -3% to 18.0%, reflecting fewer forced part-time workers and those on temporary layoff. These stats reflected the household survey of employment showing a 4.9 mil. increase.
Average hourly earnings fell by -1.2% on a seasonally-adjusted basis, which was a bit more than the -0.8% expected. Year-over-year, the pace of increase declined by a percent and a half, but remained at a pace of 5.0%. Average weekly hours for the month fell by -0.2 to 34.5.
(0) The minutes from the June FOMC meeting, while no policy action was changed, offered additional color into other matters being discussed. Included in these were forward guidance, which is essentially the communication that rates will remain low for a sufficiently long period to help offset the negative impact of the virus. Also were asset purchases, which are now essentially unlimited and include non-traditional segments such as corporate bond ETFs. A third, but not implemented at this time, was yield curve control, which has certainly been in the news (the Fed prefers to have policy options enter the public medium to avoid surprises). The possibility that yield curve control, or a ‘cap’ being placed on the interest rate of a particular treasury maturity, eventually surfaces as a formal policy tool remains in doubt. In Australia, officials have capped the 3-year government bond rate, and this has been done during WWII in the U.S., so the policy tool isn’t unprecedented. Other than policy tools, inflation remained a subject of active debate—notably what measures and ranges would be used. In some recent academic discussions, in which some Fed members were included, back-and-forth continues about how to account for inflation shortfalls, meaning that the 2% target would either be the target at every meeting, or shortfalls/excesses would be allowed to be offset through the allowance of overshoots in the other direction over time, with the 2% ending up as a long-term ‘average’ targeted level. There are no easy answers here.
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.