This Week's Market Moves | July 12, 2020

Stocks finished the week on a positive note, buoyed by encouraging news that Gilead’s remdesivir is proving to be an effective coronavirus treatment. Here are some other insights on the market and the economy this week:

The S&P 500 index has traded sideways for the better part of a month, after an impressive rally from the March 23rd lows. Stock prices are finding it challenging to push higher as concerns about the economic outlook, reopening rollbacks due to a recent surge in coronavirus cases, and warnings of impending layoffs are beginning to undermine the hopes of a V-shaped recovery. While the market climbed a wall of worry, encouraging news on Gilead’s remdesivir coronavirus treatment helped lift stock prices at the end of the week, with the S&P 500 index finishing up 1.8%.

The gap between the best and the worst performing sector within the S&P 500 index is unusually wide this year. Sector leadership remains concentrated in information technology and consumer discretionary stocks, which have generated returns of 18.8% and 14.8%, respectively, this year. On the flip side, financials and energy stocks lagged considerably, delivering losses of 22.6% and 39.2% on a year-to-date basis.

Second quarter earnings reports will start being released next week. With so many companies failing to provide guidance during the height of the pandemic, this quarter’s reports are bound to take on increased prominence and could potentially provide a catalyst for the future direction of the market. With stocks priced for a V-shaped recovery, analysts will be looking for confirmation that earnings will substantially recover over the next twelve to eighteen months to justify current valuations.

Dividend payments declined $42.5 billion in the second quarter, as compared to a year ago. This marks the biggest dividend reduction since Q1 2009 during the Great Recession. The S&P 500 produced $119 billion in Q2 2020, which is a noticeable reduction from the record $127 billion in Q1. The decline in dividend payments was quick but should subside in Q3, as many companies have already suspended or reduced their dividends. The outlook for future dividends will be contingent on the success of the reopening of the economy and the recovery of corporate profits.

Safe-haven demand for Treasuries continued, as investors start to anticipate a more prolonged recovery due to the recent rise in coronavirus cases. The 10-year Treasury yield fell to an intra-week low of 0.57%, its lowest level since late April, before rebounding at the end of the week to 0.65%. The 5-year Treasury yield and 30-year fixed rate mortgage also hit new historical lows this week of 0.26% and 3.03%, respectively.

Over the last few months, the market has started to digest the possibility that the Federal Reserve may start using yield curve controls as another means to implement monetary policy, with rates near zero. However, the minutes from the Federal Reserve’s recent policy meeting revealed that policy makers were skeptical about its effectiveness of yield curve controls. While this doesn’t rule them out at some point in the future, it looks like they are off the table for now.

Another 1.3 million Americans filed for unemployment benefits this week. The continuing claims data, those currently receiving benefits, declined to 18.1 million and the job openings data were also better than expected this week. However, the number of Americans receiving Pandemic Unemployment Assistance (PUA) has risen substantially in recent weeks. The CARES Act created this new program for freelancers, self-employed, and contract workers who were previously ineligible to collect unemployment benefits. Adding those collecting PUA benefits to the above listed claims data paints a more ominous picture of the labor market. This week’s claims report highlighted that nearly 33 million Americans, or roughly 20% of the labor force, are collecting unemployment benefits. A year ago, only 1.6 million people were receiving benefits.

The market is expecting a strong economic recovery in the second half of the year, as the economy slowly recovers from the coronavirus pandemic. However, rising hot spots around the country, particularly in the southern states of Arizona, Florida, and Texas, are causing many states to either halt their reopening plans or reimpose restrictions. Companies, like Apple, have also temporarily closed stores. While the market has been surprisingly resilient, some economists are starting to reduce their growth outlook in the second half of the year, as a longer-term slump is starting to appear more likely.

Hundreds of corporate entities have filed for bankruptcy protection since the pandemic wreaked havoc on the markets in early March. While media headlines like to focus on household names, such as Hertz, J.C. Penney’s, and most recently, Brooks Brothers, the sad reality is an overwhelming number of small and medium-size companies that don’t make the news headlines are shuttering at a rapid pace, too. These trends are troublesome, particularly given small businesses tend to be the main driver of employment growth.

Investors have largely been focused on the economic fallout from the spread of the pandemic in recent months, but that may soon start to change. With only four months left until the election, and the nominating conventions just weeks away, the key policy directions of the candidates should once again come into focus. For what it’s worth, the historical record does not favor an incumbent President when there is a recession within two years of an election.

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 13, 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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