This Week's Market Moves | August 17, 2020

Stock prices ended the week largely unchanged, with the S&P 500 index up 0.7% and the tech-heavy NASDAQ up 0.1%. While equity markets pushed towards record highs, stock gains faded by week’s end, as Congress remains divided on the details of a new economic stimulus package. Here are some other insights on the markets and the economy from last week:

After pushing towards record highs, stock price gains faded by week’s end as the market gave up hope that Congress would resolve its differences on the next coronavirus stimulus bill any time soon. Despite the disappointing news, the S&P 500 ended the week up 0.7%, just modestly below its all-time high. Financials and Industrials stocks led the market higher this week, while utilities and real estate underperformed the overall market.

U.S. Treasury yields climbed this week as the Treasury Department issued new 3-year, 10-year and 30-year bonds to finance the government’s aggressive spending measures to fight the coronavirus pandemic. The increased supply helped push Treasury yields to a five-week high, with the 10-year Treasury yield rising 14 basis points to 0.71% and the 30-year Treasury yield up 22 basis points to 1.45%. Bond prices move inversely to yields.

The Federal Reserve’s unprecedented support for the bond market has seen a rush of investors pile into the riskier corporate debt, in the aftermath of the coronavirus pandemic. As Treasury yields collapsed, corporations are hastily issuing debt to raise liquidity and take advantage of the lower borrowing costs while investor appetite is strong. Strong investor appetite has pushed junk bond yields down to 5.57%, close to an all-time low of 5.0%.

Fannie Mae and Freddie Mac, the mortgage giants who are backed by the U.S. Government, have instituted a new adverse market fee of 0.50% to most mortgage refinances starting on September 1st. The move is intended to offset some of the higher costs associated with the COVID-19-related economic and market uncertainty. The Mortgage Banking Association strongly opposes the fee, which will likely be passed directly onto consumers trying to take advantage of record low borrowing rates.

After negotiations between the House Democrats and Senate Republicans collapsed last week, the timeline for the stimulus package is still unclear. Over the weekend, President Trump announced a series of executive orders to provide temporary relief as Congress works through the impasse. While there are questions regarding the legality of the President’s actions, it remains to be seen if there will be a challenge. However, the hope is that the executive actions will spur lawmakers to come up with an agreement, but a near-term resolution does not seem likely.

Weekly initial job claims filings fell below 1 million for the first time since the pandemic began in March. Continuing claims, those currently collecting unemployment benefits, also fell to 15.5 million. The total people claiming benefits from all programs, which includes the emergency Federal Pandemic Unemployment Assistance, fell to 28.3 million, a decrease of 3.1 million from a week ago. The better-than-expected data suggests the economic recovery could be gaining traction, but markets will want confirmation that the trend will continue before pushing higher.

The consumer price index increased 0.6% July, up 1.0% on an annualized basis. The surge in gas prices accounted for a significant portion of the monthly increase. The core inflation measure, which excludes food and energy prices, was also up 0.6% in July, its largest increase since January 1991. On a year-over-year basis, core inflation is running at 1.6%. The stronger-than-expected news pushed Treasury yields higher and steepened the yield curve.

The monthly retail sales report came in weaker than expected, rising 1.2% in July. While consumers are still spending, the monthly increase is far lower than the sharp rebound seen in the previous retail sales reports. The mix of spending continues to be concentrated in online sales and groceries, with restaurants and department stores still lagging. The aggressive stimulus measures helped boost consumer activity, but with the federal unemployment benefits now expired and no new stimulus, any hints of a slowdown will add to the worries about the sustainability of the economic recovery.

Small businesses have not been immune to the disastrous economic situation unleashed by the coronavirus pandemic. While media reports have highlighted the surge in large company bankruptcy filings this year, there is no real-time data that captures the impact on small businesses. The best metric available is produced by Yelp, an online review website. Yelp is reporting that more than 80,000 small businesses across America shuttered since the beginning of March, with the restaurant industry the hardest hit. This is particularly troubling since small businesses employ nearly half of American workers.

Are armchair traders on Robinhood, and other trading apps, supporting inflated prices in certain equities? A study by Goldman Sachs revealed that daily average trades had doubled in early 2020, as individual investors stepped into the market. Robinhood went from 4 million users invested in S&P 500 stocks before the pandemic to 12 million in May. While individual investors are capable of making good investment decisions, there is concern that easy access to markets may make certain areas of the market susceptible to bubbles, thus negatively impacting individuals at a time when the economy is on shaky ground.

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 17, 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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