Monday Market Review June 29, 2020
Economic data last week included higher than expected durable goods orders, along with mixed housing and jobless claims data. Inflation results remain tempered, as expected from low consumer demand.
U.S. equity markets fell sharply last week with a continued rise in Covid infections in newly re-opened states, while foreign stocks fared generally better, with more tempered declines. Bonds were mixed, with gains due to investor flows toward treasuries, and weakness in lower quality corporate credit. Commodities were mixed, with the price of crude oil falling by a few percent.
U.S. stocks moved back and forth earlier in the week, with China rhetoric and a proposed $3 bil. in tariffs against several European nations bringing down sentiment early, offset by talks of additional planned government stimulus. Further concern came along with continued growing Covid infection rates in newly re-opened regions around the U.S., notably in the Sun Belt region, including a record day in new cases. A re-closing of bars in FL and TX late in the week heightened concerns over possible ‘second wave’ shutdowns elsewhere.
Both economists and medical professionals question the viability and public appetite for shutdowns to the degree as those implemented in March. However, the timeline for a ‘back to normal’ economy appears to have lengthened, as evidenced by the IMF downgrading its estimates for 2020 global growth to -4.9%—the worst in the post-WWII era—as well as lowering 2021 growth by a half-percent.
Every domestic sector declined last week, with technology faring best, with a minimal loss, while energy, financials, and communications fell over -5%. Energy stocks have been naturally closely tied to the spot price of crude oil, while financials were affected by disappointing stress test results for several firms late in the week. Financials were also affected by the mixed news that the Fed would be easing restrictions on riskier investments and margin requirements, yet would also cap payment of dividends and share buybacks.
Foreign stocks fared better than those in the U.S. last week, with emerging markets generally flat, followed by minor declines in Europe, and larger losses in the U.K. and Japan. A substantial European manufacturing PMI improvement to nearly expansionary levels, as did service PMI in Japan, provided a sizable sentiment boost, as did announcements of upcoming openings in Britain by early July. Further reopenings in several Chinese industries to foreign investment supported strength in emerging markets indexes, and the nation’s virus response has been seen a far more effective than elsewhere on the globe.
U.S. government bonds experienced gains last week, as investors sought safe havens away from equity markets. Corporate bonds fared less well, with flattish returns for investment-grade debt, and declines of several percent for high yield and floating rate bank loans—in keeping with a negative week for equities. Foreign developed market debt also fared well due to ‘risk off’ flows, while emerging market bonds experienced flattish results.
Commodities generally lost ground last week, with declines in energy and agriculture outweighing higher prices industrial metals and precious metals. Following the weakness in economically-sensitive assets overall last week, the price of crude oil fell by over -3% to about $38.50/barrel.
(0/-) The third and final report for 1st quarter U.S. GDP came in at -5.0%, which was unchanged from the second report and matched consensus expectations. Growth in consumption was unchanged from the prior report, while structures investment was revised upward by several percent, while inventories were revised downward. The PCE inflation measure rose by a few basis points to an annualized 1.3% rate for the quarter, as did core PCE inflation to an annualized rate of 1.7%, matching the year-over-year rate. Q1 results are now fairly outdated and irrelevant considering the depth of the Q2 decline, estimates for which remain in a relatively wide band of -30% to -40% annualized. Conditions have improved in recent weeks, with reopenings, which has caused estimates to tick up a bit.
(0) Personal income for May fell by -4.2%, beating consensus expectations for -6.0%, with results largely due to the April spike from stimulus payments fading. Personal spending rose by 8.2% for the month, below the 9.3% expected, reversing the double-digit fall from the prior month. Over the past 12 months, income is up 7%, while spending is down over -9%, with each obviously distorted by extreme changes during Covid. Similarly, May personal saving rate fell by -9.0% to a still-elevated 23.2%—due to an inflow and outflow mismatch. On a PCE basis, price inflation rose by 0.1% on both a headline and core measure. Year-over-year, headline PCE is up just over 0.5%, while core has increased by 1.0%—both far below Fed target levels.
(+) Durable goods orders in May rose 15.8% on a headline level, beating expectations for an increase of 10.5%, and reversing a sharp contraction in April. Removing the volatile transportation sector, however, the increase was pared back to 4.0%, which was still twice the growth rate expected. Core capital goods orders moved 2.3% higher, also twice the rate expected. Core capital goods shipments rose 1.8%, versus expectations for a minor decline for the month.
(-) The advance goods trade balance report for May came in showing a deficit of -$74.3 bil., wider than the prior month by -$3.6 bil., and wider than the -$68.2 bil. expected. Goods exports fell by -$6 bil., which overpowered the drop in goods imports of -$2 bil., due to manufacturing slowdowns.
(0) The FHFA house price index rose 0.2% in April, a tenth short of forecast. Just over half of national regions saw increases, with the Great Plains and Great Lakes experiencing the largest gains—over a half-percent each. The South Atlantic segment (MD through FL) saw price declines of a half percent. This brought the year-over-year change down nearly a half-percent to 5.5%, which remains robust from a historical standpoint. This current economic downturn has obviously not damaged residential real estate markets to anywhere near the degree of the financial crisis over ten years ago, despite a slowing in sales activity.
(-) Existing home sales for May fell by -9.7% to a seasonally-adjusted annualized level of 3.91 mil. units, surpassing the expected -5.6% drop. This also brought the year-over-year change in existing home sales down -27%. Both categories of homes experienced declines, although condos/co-ops fared a few percentage points worse at -13%. Activity in all four regions fell in a fairly tight range around -10%, with the Northeast and West faring worst. As expected, higher joblessness, and weaker consumer activity generally, including social distancing, has made house shopping a more difficult and less desirable activity.
(0/+) New home sales for May rose by 16.6% to a seasonally-adjusted annualized rate of 676k, a bit better than the 640k level expected—partially due to downward revisions to several prior months of up to -50k. New home sales are up 13% over this time last year. Regionally, the South and West each saw the sharpest gains, while sales in the Midwest declined. This was largely in keeping with more widespread economic openings in those regions, which appeared to carry over to house shopping.
(-) The final June version of the Univ. of Michigan index of consumer sentiment fell by -0.8 of a point to 78.1, below the 79.2 level expected. Respondent assessments of current conditions as well as expectations for the future generally fell in equal measure. Inflation expectations for the next year were unchanged at a high 3.0%, while those for the coming 5-10 years declined a tenth to a still-elevated 2.5% level.
(-) Initial jobless claims for the Jun. 20 ending week fell by -60k to 1.480 mil., which was above the 1.320 mil. expected, with large gains in CA, IN, and FL. Continuing claims for the Jun. 13 week fell by -767k to 19.522 mil., just below the 20.000 mil. estimated. There remain some counting issues with the continuing claims report, such as timing of filing schedules in certain large states, but regardless, the numbers of unemployed or furloughed workers (also hard to get an exact count between) remain historically high.
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, Taxfoundation.org, 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.