• Jeran Van Alfen, CFP®

Monday Market Review June 1, 2020


On a shortened holiday week, economic data continued its lackluster trend, now reporting the well-known weakness of April and May in many industries. Included were weaker numbers for durable goods, jobless claims, and pending home sales. Consumer sentiment and housing prices were mixed.

Global equity markets gained with optimism over lockdowns easing and a slow return to normalized activity. Foreign stocks outperformed U.S., helped by a weaker dollar. Bonds gained upon lower interest rates, and tighter credit spreads. Commodities gained along with hopes for economic recovery, led by higher crude oil prices—which have come a long way in recent weeks.

Market Review

U.S. stocks rose in unison with continued easing of extreme lockdowns across the U.S., moving the S&P 500 over the 3,000 level once again—only down -5% on a year-to-date basis at this point. By sector, cyclical/‘value’ stocks in the financials, industrials, and materials groups rallied well over 5% each, as did real estate and utilities, while energy and communications lagged with minimal gains.

This positivity seemed to override less favorable geopolitical news in the background. The strain in the relationship between the U.S. and China has been re-intensifying, triggered by Covid, but a crackdown on autonomy by the Chinese in Hong Kong has also caused reaction from other nations. By the end of the week, it appeared that Phase 1 of the U.S.-China agreement wasn’t in jeopardy, which pleased markets. The protests in dozens of cities (including internationally), following the death of George Floyd in Minneapolis, did not appear to affect market sentiment last week; however, the intensification to civil unrest and property damage over the weekend occurred after markets closed for the weekend. While such events have not tended to play a major role in the broader economy, especially when already beaten up by the Covid shutdowns, the indirect political ramifications remain an open question.

Partially or largely due to a battle between the President and Twitter, for fact-checking notices placed on the administration’s tweets, there have been threats of legal protections being removed from social media companies. Social media firms have generally been protected from legal claims, due to their status as content platforms or facilitators, as opposed to creators of their own content.

Foreign stocks gained to an even greater degree than domestic, with the same tailwinds of optimism of reopenings and further government economic stimulus. In Europe, this was the release of additional details and rationale for the €750 billion plan (representing nearly 5% of EU GDP), and would represent the first instance of fiscal flows moving between member nations—considered key by many in solidifying the integration of the union, but also long resisted by others opposed to ‘bailouts’. As in the U.S., the severity of the Covid-related shutdowns have made some policies far more viable than they would have been previously. Equity results in local terms were similar to those in the U.S., but a weaker dollar pushed returns a bit higher. Japanese and European stocks led the way, surpassing the U.K. and emerging markets. Commodity- and cyclically-sensitive stocks fared best, including Brazil, Australia, and Indonesia.

U.S. bonds fared well as interest rates ticked lower across the yield curve, despite ‘risk-on’ behavior last week. Credit fared slightly better than government, with high yield and floating rate bank loans leading the way. The U.S. dollar fell by over a percent, pushing flat returns for foreign bonds into positive territory for both developed markets, and even more so for emerging.

Commodities rose across the board last week, with increasing numbers of economies reopening prompting optimism in everything from energy, to industrial metals and agriculture. The price of crude oil rose by nearly 7% to over $35/barrel, as markets continued to follow the optimism of risk assets generally to a possible light at the end of the Covid tunnel. Perhaps unthinkable as recently as a few weeks ago when oil was being given away for ‘free’ essentially, spot prices recovered by 60% in May alone.

Economic Notes

(-) The 2nd estimate of U.S. Gross Domestic Product for Q1 was revised down by two-tenths to -5.0%, a bit below than expectations for no change. This data is more outdated than usual, considering the impact of Covid, but personal consumption, business structures, and intellectual property investments were revised higher, while this was outweighed a bit by downward revisions for equipment and residential investment. The drag from inventories was revised down, which might provide some modest ‘tailwind’ for an expected very poor Q2. Core PCE inflation was revised down by another tenth to 1.65% on an annualized quarter-over-quarter level, bringing the year-over-year rate to 1.7%—both below the Fed’s 2% target.

Speaking of Q2, the estimates have continued to vary dramatically, without the usual levels of precision to the tenths of a percent that characterize estimates in more normal times. GDP is expected to fall off a cliff from anywhere from -25% to -50% (on an annualized basis, which is how GDP is usually quoted). The Atlanta GDPNow forecast has been downgraded from -40% to over -50% for the period. This is indeed expected to be the worst quarter since the Great Depression of the 1930’s, although much swifter due to the nature of the shuttering of the economy. In recent weeks, it appears speed in reopening industries and regions has taken on greater magnitude than the medical impacts, which could range from lockdown burnout to some degree, but most significantly from political pressures from the severe economic damage of closures.

Essentially, earning zero revenue while still being subject to some fixed costs (rent, salaries, etc.), government assistance aside, remains the ultimate worst-case scenario many businesses are experiencing. The coming months will provide a better snapshot of how willing consumers are to again re-engage socially and business willing to invest capital for expansion. This remains heavily dependent on the medical environment. If that remains in flux, there could be a medium-term drag remaining on economic growth going forward.

(0/-) Personal income for April rose an extreme 10.5%, due the government transfer payments from the CARES Act, although wage/salary income fell by -8%. Personal spending, on the other hand, fell by -13.6%, due to a lack of consumer buying. This expanded the personal savings rate by 20% to 33.0%. The core PCE inflation index fell by -0.5% on a headline level, and -0.4% for core. This brought the year-over-year PCE inflation rates to 0.5% and 1.0% for headline and core, respectively.

(-) Durable goods orders for April fell by -17.2%, which was not quite as severe as the -19.0% expected by consensus. Core capital goods orders fell -6%, which was also not as bad as the -10% expected. Core capital goods shipments fell by over -5%, which also outperformed the forecast of -12%. Interesting, a low response rate to this survey may have played a role in the fact that conditions were reported as being worse.

(+) The S&P/Case-Shiller home price index rose 0.5% in March, beating expectations calling for 0.3%. Prices rose in all 20 cities, led by Tampa, Seattle, and Cleveland—each up over 1%. The month actually saw a nearly half-percent acceleration in year-over-year growth to 3.9%.

(0/-) On the other hand, the FHFA house price index rose 0.1% in March, which disappointed relative to the 0.5% consensus forecast. Prices rose in all but two of the nine regions—New England and the mountain states were each up a percent, while the northern plains states fell over a half-percent. The year-over-year rate fell by a few tenths to 5.9%, which remains quite robust compared to history. The Covid-based economic slowdown has not been focused on residential real estate, unlike the 2008 financial crisis, which could help this industry stay afloat better than some others. It seems each recession has a different epicenter, and they don’t tend to necessarily repeat from cycle to cycle.

(+) New home sales in April rose by 0.6% to a seasonally-adjusted average annualized level of 623k, beating consensus expectations calling for a drop to 480k. Regionally, the South saw the strongest bounceback, while the West continued to experience a drop in sales—both trends in keeping with the degree of Covid lockdown levels. Year-over-year results showed a decline of ‘only’ -6%, which is almost remarkable considering the extreme pullbacks in economic activity. This index held up much better than existing home sales, which fell to their slowest pace in ten years. Single-family housing markets remain tight in terms of inventories.

(-) Pending home sales fell a sharp -21.8% in April, beyond the -17.3% median forecasted figure. Pending sales fell in every region, led by the Northeast and West—areas most heavily hit with virus concerns. Year-over-year, the rate of change fell by nearly -35%. Pending sales are not complete sales, per the description, but do have a predictive tendency for new home sales a few months out. In this environment, a severe drop-off has been expected.

(0) The Conference Board index of consumer confidence ticked up by 0.9 of a point to 86.6 in May, just below the 87.0 forecasted level. A decline in assessments of present conditions of nearly -2 points was offset by an improvement in expectations for the future by nearly 3 points. The labor differential, which reflects the ease in finding employment, rose by 5 points, but remained negative generally.

(-) The final May reading of Univ. of Michigan index of consumer sentiment fell by -1.4 points to 72.3, below the 74.0 level expected by consensus and a reversal of a slight gain in the preliminary report. Assessments of current conditions and expectations for the future both declined. Inflation expectations for the coming year interestingly rose by 0.2% to 3.2%, while those for the next 5-10 years rose a tenth to 2.7%.

(-) Initial jobless claims for the May 23 ending week remained very high, but fell by -315k to 2.123 mil., just above the 2.100 mil. forecast. Continuing claims for the May 16 week fell by -4.0 mil. to 21.052 mil., well under the median forecast of 25.680 mil. These numbers remain very ugly, and record-breaking. Initial claims numbers remain driven by delayed claims applications in many locations experiencing difficulty in processing such large volumes. On the other hand, some rehiring may be taking place, bringing down continuing claims levels.

(-) The Fed beige book report, describing regional economic anecdotes around the country for April and early May, showed generally contracting growth throughout. In keeping with the obvious, leisure/hospitality was hardest hit, but manufacturing also suffered sharp declines, in the segments of autos, aircraft and energy. Labor markets were negatively affected, with labor supply falling off with expanded unemployment benefits reducing incentives to work, in addition to ongoing health and childcare concerns. Inflation was tempered nationwide, due to lower demand for consumer items, as well as the impact from the drop in oil prices, which affected gasoline; on the other hand, some items affected by supply chain problems, like meat, saw higher prices. Consumer spending eroded due to the obvious factor of shuttered retail stores, but even more so in leisure/hospitality, as well as sales for big-ticket items, such as autos. However some signs of life were seen in May with a gradual trend toward re-opening, which is what many economists have hoped. Business sentiment remained generally weak, with a high level of medical uncertainty continuing to dominate. Again, the negativity of conditions reported during this timeframe are relatively obvious to many readers, but any signs of life in future reports could be a much better marginal indicator of improvement. Nothing in this report was earth-shattering.

Have a good week.

Provided by:

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.

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