This Week's Market Moves | July 20, 2020
The S&P 500 index finished the week up 1.3%, as optimism over vaccine developments outweighed fears of another economic setback due to surging coronavirus cases. Here are some other insights on the markets and economy from last week:
Encouraging news on vaccine developments from Moderna lifted stock prices early in the week, but gains quickly faded as investors worried that rising coronavirus cases and reimposed restrictions could derail the recovery. After enduring a bumpy week of trading, the S&P 500 index notched up another weekly gain of 1.3%, to close back within 5% of its February high-water mark.
The average rate on the 30-year fixed rate mortgage fell to an all-time low of 2.98% last week, its lowest level in almost 50 years. This is the seventh time since March that mortgage rates have hit a new low, largely due to the continued decline in government bond yields. Lower mortgage rates have led to a surge in refinancing activity and new home applications, despite the continued economic uncertainty and high unemployment rate.
The outlook for second quarter earnings is bleak. After a dismal first quarter, the market is anticipating S&P 500 earnings will collectively decline by more than 40% from a year ago. This would be the largest quarterly decline since the final quarter of 2008. While results are expected to vary significantly, with information technology and healthcare holding up better than financials, no sector is expected to report positive earnings growth during the quarter.
Big banks were among the first to report second quarter earnings, which were generally better than expected. However, the six biggest U.S. banks, which include JP Morgan, Citigroup, and Wells Fargo, are bracing for more bad news, announcing they have set aside a combined $36 billion for loan-loss provisions. This is the most banks have set aside for bad loans since 2008. Corporate executives warned off an unpredictable environment and cautioned about the deteriorating economic outlook. The financial sector has been one of the worst performers this year, down 21.1% on a year-to-date basis.
U.S. consumer prices posted the biggest monthly gain since 2012, snapping back from three months of declines. The 0.6% rise was largely driven by rising gasoline prices, which accounted for more than half of the monthly increase. However, sharp declines in oil prices over the last year have kept a lid on inflation, with consumer prices up only 0.6% on an annualized rate. The core measure, which excludes food and energy prices, rose 1.2% over the last twelve months.
The trend in weekly jobless claims continues to slow, but another 1.3 million lost their jobs last week. Continuing claims, which reports the total number of Americans claiming ongoing benefits in state programs, declined slightly to 17.3 million. The total number of unemployed people claiming benefits in all programs, including the temporary Federal Pandemic Unemployment Assistance (PUA) relief and other programs, now stands at 32 million.
The extra $600 enhanced boost to unemployment benefits is set to expire at the end of the month. This added benefit was rolled out in the CARES Act to provide financial stability to households during the crisis. Policymakers are at a standstill regarding whether to extend this benefit, as some are concerned the extra boost is creating a disincentive for displaced workers to return to work. This view has been supported by a recent paper by the National Bureau of Economic Research (NBER), which highlighted that nearly two-thirds of unemployed workers are eligible for benefits that exceed their normal wages. While we do not know what - if anything - will replace it, the timing could not be worse, as the economic recovery appears to be losing momentum.
Retail sales posted a blockbuster gain, soaring another 7.5% in June, as businesses reopened after shuttering in mid-March to contain the spread of the coronavirus. The stronger-than-expected gain sent retail spending back to pre-pandemic highs. However, there are some concerns that the V-shaped rebound in sales may not be sustainable as coronavirus infections continue to spread.
Fed officials delivered mixed messages on the outlook for the economy this week. St. Louis Fed President Bullard struck a more optimistic tone, expecting a solid recovery in the second half of the year if the coronavirus can be kept under control. However, Fed Governor Brainard, one of the voting members of the Federal Open Market Committee (FOMC), delivered a more somber message warning about a possible double-dip in economic activity. Dallas Fed Chair Kaplan echoed her comments.
Tensions are heating up again between the U.S. and China. Not only is a Phase Two trade deal off the table, the U.S. administration is also ending its preferential treatment for Hong Kong just weeks after China passed a new national security law that asserts more authority over the territory. This news would have sent market’s reeling a year ago, but the market appears to be more focused on vaccine developments and coronavirus trends these days.
Indices: Core Bond: Bloomberg Barclays U.S. Aggregate Index, High Yield: ICE BofA US High Yield, Large Value: Russell 1000 Value Index, Large Blend: S&P 500 Index, Large Growth: Russell 1000 Growth, Emerging Markets, MSCI EM NR USD, Foreign Equities: MSCI ACWI Ex USA NR USD, REITs: FTSE NAREIT All Equity, Small Blend: Russell 2000
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Note that this article was published on July 20, 2020. Data represented is as of the publication date. The information contained herein has been obtained from sources that are believed to be reliable. However, Cammack Retirement Group does not independently verify the accuracy of this information.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.
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