This Week's Market Moves | July 27, 2020

The U.S. equity markets finished the week lower, as investors feared the relentless rise in coronavirus cases might stall the economic recovery. An unexpected rise in the initial jobless claims data and escalating tension between the U.S. and China added to the negative sentiment. Here are some other insights on the markets and the economy from this past week:

Stock markets broke out of their consolidation range, hitting a four-month high, before reversing course towards the end of the week. Investors rushed to lock in gains, as a surge in coronavirus cases, escalating U.S. – China tensions, and an unexpected rise in new jobless claims threatened to derail the recovery. The S&P 500 index finished 0.3% lower during the week.

Yields on inflation-adjusted interest rates have tumbled in recent weeks, with the 10-year U.S. real yield falling to an all-time low of -0.93%. While 10-year Treasury yields have declined to 0.58%, they have not fallen at the same pace. This has led to a big jump in the break-even rate, which measures the difference between nominal and real interest rates (or what the market refers to as inflation expectations) since the mid-March lows. While few expect inflation to rise meaningfully as the economic recovery remains sluggish, the market may be starting to sniff out the Fed’s willingness to let inflation run above its 2.0% target for the foreseeable future.

The Federal Reserve’s pledge to buy corporate bonds to support smooth market functioning has fueled demand for investment grade bonds, causing spreads to reverse a significant portion of the losses incurred last quarter. Less so for the high yield market, particularly the lower-rated segments of the sector, which are more vulnerable to default risk. While spreads have rebounded significantly, they are still wider than their pre-pandemic levels.

The U.S. dollar index, which measures its value against its major trading partners, has weakened to its lowest level since 2018. Bearish sentiment on the U.S. dollar has gathered momentum in recent weeks, as plunging real rates and concerns about the strength of the recovery weigh on the safe-haven currency.

The CBOE Volatility index (VIX), more commonly known as the “Fear Index,” fell back to 24 this week, its lowest level in five months. This is a sharp reversal from the index’s spike to 83 when equity markets plunged in mid-March. With the VIX steadily declining towards its longer-term average of 20, it is not surprising to see the S&P 500 Index move higher in recent weeks. Historically, the VIX and the S&P 500 Index tend to trade inversely to one another.

Initial unemployment claims rose to 1.4 million this week, ending fifteen consecutive weeks of declines. The increase in the number of Americans seeking unemployment assistance follows on the heels of many states delaying or rolling back their reopening plans. There are still 16.2 million Americans currently receiving benefits through state programs and 31.8 million through all programs.

The relentless rise in coronavirus cases is beginning to diminish hopes that a quick return to normal economic activity is in the cards. While massive stimulus efforts have led to a V-shaped recovery in the financial markets, the economic restart has been messy as health concerns persist. All eyes remain on Washington to see if Congress can agree on another coronavirus relief bill. However, lawmakers are unlikely to resolve their differences before the Federal boost to unemployment benefits ends next week.

A federal moratorium on evictions was implemented at the start of the coronavirus pandemic to protect tenants who were struggling to pay their bills during the economic shutdowns. While rules vary across states and localities, the federal protection that was put in place will soon be expiring. This comes at a time when state and local eviction bans are also starting to expire, leaving millions of renters potentially at risk.

After weeks of debate, the European Union (EU) passed a 750 billion Euro stimulus package to help member nations deal with the economic fallout from the coronavirus. The landmark package, which required unanimous approval from the 27 member states, approved issuing joint debt. This is a significant step towards greater fiscal coordination of the member nations and should help pave the way for a stronger European recovery. Renewed optimism pushed the Euro to its highest level since January 2019.

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 27, 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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