This Week's Market Moves | May 11, 2020
Despite the grim jobs report for April, stocks continued to accelerate, with the S&P 500 gaining about 3.6%. Here is whatdrove the markets this week:
The unstoppable recovery in stock prices continued this week. Optimism about the re-opening of America, a slowing number of infections, and massive stimulus continue to lift stock prices. Concerns with the economic toll of the coronavirus outbreak and worries about rising trade tensions took a back seat this week.
The tech-focused Nasdaq Composite Index breeched into positive territory for 2020 during the week. The Nasdaq is the first major equity index to go into positive territory, with year-to-date performance at 1.58%. The index has been supported by strong relative returns from Apple, Facebook, Amazon, Alphabet, and Netflix. The market capitalization of Amazon is now the size of the entire high-yield market and twice the size of the entire energy sector.
A record amount of U.S. debt is about to flood the markets in the coming weeks. The Treasury Department unveiled plans to issue a record $3 trillion between now and the end of June to pay for the federal government’s stimulus measures. This will include a shift towards more longer-term debt issuance and the re-introduction of 20-year bonds. The yield curve steepened on the news.
While the Federal Reserve has repeatedly stated that negative interest rates are off the table in the U.S., that has not stopped the market from beginning to price them in. This week, the fed funds futures contract, a gauge of where markets expect the official fed funds target rate to be, is beginning to price in negative interest rates later this year, dragging the yield on two-year Treasuries to a record low at 0.15%. The five-year Treasury rate also hit an unprecedented low, closing the week at 0.33%.
Earnings estimates continue to be revised lower, with the businesses most impacted by the COVID-19 shutdowns (i.e., airlines, hotels, restaurants and retail) feeling the brunt of the markdowns. Consensus S&P 500 forward revenues and earnings have fallen at rates that parallel the declines during the financial crisis of 2008-09. With earnings reports from 70% of the companies in, the S&P 500 Index, as of May 8, points to final first quarter S&P 500 EPS down 20% year-over-year.
After plunging into negative territory last week, oil prices have staged a huge rebound, with the June West Texas Intermediate (WTI) oil contract rising to $24.66 per barrel. With much of the global economy starting to re-open, energy producers are hoping that demand will pick up again.
The Labor Department delivered a historically bad employment report on Friday, showing 20.5 million jobs lost in April. The unemployment rate rose to 14.7% in April, the highest level since the Great Depression. While the amount of job losses is staggering, the market was encouraged that the number of weekly job losses continues to decline. 3.2 million Americans filed for unemployment benefits this week, bringing the total to over 33 million who lost jobs since the pandemic began. The largest employment declines are in leisure and hospitality industries.
The Mortgage Bankers Association reported that the share of U.S homes in forbearance rose to 7.5% in the week ending April 26th. That equates to nearly 3.8 million homeowners who are in distress due to the COVID-19 shutdowns. Between rent strikes and late mortgage payments, the housing market and commercial real estate sector are facing the toughest environment since the 2008 financial crisis.
Germany’s top court ruled that the European Central Bank’s (ECB) long-standing program of asset purchases is unconstitutional, requiring its central bank, the Bundesbank, to refrain from any future purchases. Bond spreads between Germany and peripheral Europe (e.g., Italy and Spain) are widening and the Euro is weakening versus the U.S. dollar.
Indices: Core Bond: Bloomberg Barclays U.S. Aggregate Index, High Yield: ICE BofA US High Yield, Large Blend S&P 500 Index, Emerging Markets, MSCI EM NR USD, Foreign Equities: MSCI ACWI Ex USA NR USD, REITs: DJ US Select REIT, Small Cap: Russell 2000
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Note that this article was published on May 11, 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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