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Market Commentary for the week ending May 30th, 2020

Summary

  • The total number of people collecting unemployment benefits fell for the first time since the Pandemic'’ start
  • Stocks rallied around the world with Eurozone markets posting some of the biggest gains
  • Low corporate bond yields, the number of people returning to the skies, and stabilizing consumer confidence are good signs for the economy

 

Economic Bright Spots

New Home Sales

The economy is slowing reopening fueling investors continued optimism that the economic carnage inflicted by the pandemic will be quickly heeled. There are several signs that some sectors may recover quickly due to pent up demand including the housing sector. This week new home sales were reported for the month of April coming in at an annualized rate of 623,000 homes. This was far better than economists had expected and down only -6.2% from the same month a year-ago.

New Home Sales year over year change

Source:U.S. Census Bureau: https://www.census.gov/construction/nrs/historical_data/index.html

As the above graph shows new home sales had been surging higher but a decline such as we saw in the most recent month is really not out of the ordinary. Two factors likely contributing to this strength are record low interest rates making housing more affordable as well a very low inventory of existing homes for sale.

Although new home sales are performing relatively well nationwide the difference by region is dramatic. In the Northeast and West sales are down -26% and -34% respectively while in the Mid-west and South numbers are up +26% and +5%.

Corporate Bond Yields

Investors’ confidence in businesses is not only being reflected in the stock market the past two months but also in the bond markets. Corporate bond yields, the price companies pay to borrow money, are back near multi-year lows as illustrated in the below graph. There was a massive spike in yields when the pandemic first broke and concerns mounted about the possibility of wide-spread bankruptcies. Those fears though quickly subsided helped by an unprecedented move by the Federal Reserve to support these bonds.

Corporate Bond yields

Source:www.YCharts.com Moody's Seasoned Aaa Corporte Bond Yield

In addition to new home sales and low corporate bond yields, additional economic bright spots are discussed below.

Interesting Numbers of the Week

+202%

The number of travelers screened nationwide by the TSA during the past 7 days increased +202% from its low in mid-April as travelers return to the skies. As the accompanying graph shows, the trend has been steadily climbing in recent weeks, a good sign, but still remains about 88% below year ago levels.

TSA Checkpoint Numbers (daily) March 1 - May 28, 2020

+10.5%

Personal income surged +10.5% in April surprising economists who had forecast a drop of -2.2%. The increase is entirely due to the government’s one-time payments to millions of U.S. households. Wages and salaries fell -8%.

This Week’s Performance Highlights

Market Indexes week ending May 29, 2020

Source: www.YCharts.com

After a hair-raising February and March, the markets have now put together two back-to-back monthly gains with the S&P 500 up +36.1% from their late-March lows. The “Risk On” investor behavior from the prior week continued throughout most of this week’s shortened holiday week with generally the year’s worst performing and riskier investments outperforming less risky.

  • Large U.S. stocks, as measured by the S&P 500, gained +3.0% for the week. The Dow Jones Industrials, previously lagging behind, outperformed for a second week gaining +3.8%.
  • The NASDAQ Composite, one of the best performers UP year-to-date by +6.2%, lagged behind in the most recent week but was still higher by +1.8%. The accompanying table shows some of the biggest tech names and how they have lagged behind since mid-May after having been some of the best performers during the early stages of the pandemic.

    Big tech Lagging since Mid-may

    Source: www.YCharts.com

  • Small U.S. stocks continued to add to their recent gains up +3.0% for the week but continue to trail large U.S. stocks year-to-date by a meaningful margin.
  • International stocks had their time in the spotlight this week outperforming across nearly every region gaining an average of +4.7%. Eurozone markets including Italy, France, Spain, and Germany, all gained +6.4% or more for the week on the heels of an $826 billion stimulus plan.
  • Emerging markets also did well gaining +3.6%. Getting left behind during this recent rally due to political unrest has been both China and Hong Kong up +1.3% and down -4.3% respectively in the most recent week.
  • Real estate stocks posted their second consecutive big weekly gain up +5.0% this week after the previous week’s +7.0% gain. As detailed in last week’s blog the performance by property type varies widely and the long-term outlook for commercial properties is not clear.
  • Commodities prices rose +2.6% as the price of oil moves further higher on hopes of a faster than originally expected economic recovery. Gold, was down -0.2% for the week as investors embraced riskier assets but remains higher by +14.0% in 2020.
  • Bond prices inched higher by +0.3% and are now higher by +5.7% year-to-date.

Economic Indicators

Initial jobless claims decreased from the prior week, coming in at 2.1 million, but remain nearly 10 times pre-pandemic levels. The great news though is the continuing claims, or the total number of people receiving benefits, fell to 21.05 million from 24.9 million the week before suggesting many people are returning to or finding new work. The question remains as to how many of the massive number of layoffs are temporary or permanent.

Consumer Confidence stabilized in May coming in at a reading of 86.6 after falling sharply the month before. This is further good news for the economy as consumer spending drives about two-thirds of the economy and more confident consumers tend to spend more money. When drilling down into the details of the report, consumers were slightly less confident about the current economic conditions but more optimistic about the outlook in six months as many expect the impact of COVID-19 to pass rather quickly. In a separate report from the University of Michigan, their Consumer Sentiment reading also inched higher in May.

During the month of April, expected to be the low point during the Pandemic, consumer spending fell -13.6% following the -6.9% decline in March. All of this was generally expected given other previously reported economic data. A bit of a surprise though was the +10.5% jump in personal income entirely driven by government payments to consumers as discussed above.

Orders for durable goods plunged for a second month falling -17.2% in April. Transportation, such as orders for airplanes, was the hardest hit down -47.3%. On the bright side, economists has expected business investment, a key measure for the economy, to fall by -15.4% but it was only down -5.8%. Hopes are that numbers will start improving with the reopening of the economy.

Upcoming Economic Reports

  • Employment Report
  • Initial Jobless Claims
  • Factory Orders
  • Motor Vehicle Sales
  • ISM Manufacturing Index

Contact Mark A. Patton :