Insights


This Week's Market Moves | August 10, 2020

Equity prices finished the week higher as second quarter earnings came in better than expected, with the S&P 500 Index closing up 2.5%, just shy of its pre-pandemic high. Here are some other insights on the markets and the economy from this past week:

Stock prices edged higher last week, despite Senate Republicans and House Democrats struggling to find common ground on the next coronavirus stimulus package. The main roadblocks are the size of the proposed bill and the amount of extra federal unemployment benefits. However, the lack of progress on a deal did not stop stock prices from marching higher, as positive earnings surprises continue to lift the market. The S&P 500 Index ended the week with a gain of 2.5%, just 1.0% from its pre-pandemic high. The tech-heavy NASDAQ topped 11,000 to another record close and is now up 23.4% on a year-to-date basis.

Earnings season is off to a good start. With nearly two-thirds of U.S. companies reporting thus far, over 80% have beat their earnings estimates. According to FactSet, this is the highest percentage of S&P 500 companies reporting a positive surprise since they started tracking this metric in 2008. While this is encouraging news, it is worth mentioning that analyst expectations were extremely depressed given the heightened uncertainty amid the coronavirus pandemic – thus, the bar was set very low. For the second quarter, S&P 500 earnings is expected to drop 35% from a year ago. If this holds after all companies have reported, it will be the biggest quarterly decline in earnings since the financial crisis.

While equity markets are near, or above, their pre-pandemic highs, U.S. Treasury yields have largely traded sideways since mid-March. With concerns about the strength of the economic recovery being called into question as coronavirus cases continue to mount, U.S. Treasury yields are on the cusp of making new all-time lows once again. The benchmark 10-Year Treasury yield closed at 0.56% this past week, falling from a high of nearly 1.9% at the beginning of the year.



Mortgage rates fell to another record low last week, the eighth record set this year. However, home affordability has diminished, as low inventory and high demand has offset some of the benefits of lower rates. Only 59.6% of new and existing homes sold in the second quarter of this year were considered affordable to families earning an adjusted median income of $72,900, according to the National Association of Home Builders/Wells Fargo Housing Opportunity Index. This figure is down from 61.3% in the first quarter of 2020 and is the lowest reading in 18 months. The national median home price jumped to a record $300,000 from $280,000.

The ongoing deterioration in U.S. public finances prompted a shift in its credit outlook from stable to negative according to Fitch Ratings. While the U.S. still maintains a AAA-rating from Fitch, the highest available, its persistently high fiscal deficits and debt are becoming worrisome. With the massive increase in borrowing to pay for all the coronavirus stimulus in recent months, the country’s debt-to-GDP ratio will likely rise to 130% next year.

Money supply has exploded since the end of last year, as the Fed and Congress stepped up their stimulus efforts since the start of the coronavirus pandemic. The growth in money supply is normally one of the most powerful indicators for rising inflation and right now it is growing at over 20% on a year-over-year basis. However, the link between money supply and inflation has been tenuous since the Great Recession. This is because the velocity of money, or the rate at which money changes hands in the economy, has fallen as consumers and businesses have been holding onto cash and not spending it. With the velocity of money still collapsing, runaway inflation seems unlikely.

1.2 million Americans filed for unemployment benefits last week, down 249,000 from the prior week. Continuing claims, or those currently receiving benefits, also declined 844,000 to 16.1 million. While the data showed some improvement from the prior reports, it is the 20th consecutive week that claims have run above 1 million. This suggests the jobs recovery is likely to remain slow and challenging.

The labor market report was better than expected, with U.S. employers adding 1.8 million jobs in July and the unemployment rate falling from 11.1% to 10.2%. The biggest gains this month came from industries that were hard hit, such as leisure and hospitality, during the coronavirus lockdown. While encouraging, this month’s gain was a far cry from the combined 7.5 million jobs added in the two previous reports. So far, the economy had added back less than half of the 22.1 million jobs lost since the start of the pandemic.

Bankruptcy filings show no signs of slowing for the troubled retail sector. According to Bloomberg, at least 25 major retailers have filed for bankruptcy in 2020, with 10 companies filing over the last five weeks. Adding to the list of causalities, Tailored Brands, which owns Men’s Warehouse and Jos. A. Bank, department store Lord & Taylor, and retail chain Ascena Group, the parent company of Ann Taylor and Lane Bryant, have filed for bankruptcy in recent weeks.

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 August 10, 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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