Market Commentary for the week ending June 13th, 2020
- The market rally paused as stocks fell around the world on concerns of a second COVID-19 wave.
- The Federal Reserve reiterated its plans to use all of its available tools to provide continued economic support.
- Some bonds rallied on the Fed’s news while riskier bonds declined.
The NASDAQ Composite closed above 10,000 for the first time midweek as the biggest technology stocks continue to propel higher. This tech-heavy stock index has outpaced most others not only during our 2020 pandemic bear market but also during major period but one since its inception.
The NASDAQ Composite’s history goes back to February 1971 with the index starting at a value of 100. It consists of stocks that trade on the Nasdaq stock exchange as opposed to the New York Stock Exchange. Many of the largest technology companies stocks are listed on the Nasdaq exchange leading to the NASDAQ Composite Index often being referred to as a tech-heavy index although it includes a variety of non-tech stocks as well.
The performance of the NASDAQ has been impressive as illustrated in the accompanying table. Since it’s inception $1 invested in the NASDAQ would be worth $95 today while the same $1 invested in the S&P 500 would be worth just over $30. When breaking the performance history into various sub-periods, the NASDAQ outperforms the S&P 500 in every period except what is often called the Tech Wreck of 2000 – 2002.
As illustrated in the table, the NASDAQ Composite fell -78% from the market high in 2000 to its low about 2 ½ years later in late 2002. Although this is a miserable drop in value, it’s important to remember that the index had surged 250% in less than 18 months running up to its March 2000 high. It took more than 15 years for the index to reach a new all-time high while it took just over 6 years for the S&P 500 to do so.
The popularity of the NASDAQ Composite has never been higher than it is today. Large tech stocks have been leading the market higher and many investors expect this trend to continue. I believe though that investors always need to be cautious about expecting the most recent trends to continue indefinitely.
Interesting Numbers of the Week
Fifteen of the 17 Federal Reserve officials who participate in the interest rate-setting meetings say they expect to hold interest rates near 0% through 2022. Furthermore, Fed Chairman Powell said in a speech the Federal Reserve is committed to using its tools to do whatever it can for as long as it takes to support the economy. In last week’s blog I highlight several of the Fed’s biggest programs since the start of the pandemic.
From January through April when stocks fell sharply, 64% of actively managed U.S. stock funds underperformed the index. As the Wall Street Journal notes, this was “a prime environment” for these so-called stock pickers giving them the opportunity to select winners and losers but instead they failed to beat a broad market index. This poor performance of actively managed funds during this recent bear market is consistent with the long-term results showing 88% of actively managed U.S. stock funds underperforming during the past 15 years. This is continued support for the use of low cost index funds.
This Week’s Performance Highlights
Stocks paused following their once-in-a-century rally as many of the rally’s biggest winners quickly reversed course. The selling was widespread with every sector in the U.S. lower and every major market around the world down as well. Some people pointed to the risks of a second COVID-19 wave of outbreaks as the economy continues to reopen along with Federal Reserve comments that they expect the economy to take some time to heal.
- Large U.S. stocks as measured by the S&P 500 lost -4.8%. This was better than the Dow Jones Industrial’s drop of -5.6% but more than double the NASDAQ Composite’s decline of just -2.3%.
- Although every sector was lower with energy and financials falling the most, -11.2% and -9.2% respectively, there was renewed interest in technology stocks which only fell -2.0%. Some of the largest tech stocks, shown in the below table, actually posted nice gains for the week adding to their 2020 positive performance.
- Small U.S. stocks suffered a big loss of -7.9% for the week and are back down -16.2% year-to-date. These stocks were some of the hardest hit in the early stages of the pandemic and also were some of the best performing off the late March lows.
- International markets held up somewhat better than U.S. markets this week with developed country stocks down -4.0%. Among Japan, the Eurozone, and Australia, Japan was the best performing losing just -1.6% and has also held up the best year-to-date down only -5.2%.
- Emerging markets were down the least for the week off -2.6% helped be a loss of only -1.7% in Hong Kong, among the biggest of the emerging markets, though none of these markets suffered any major losses.
- Both real estate stocks and commodities turned lower after rallying sharply in recent weeks.
- Gold regained its luster, as is generally the case during periods of aggressive selling, gaining +2.9% for the week and higher year-to-date by +13.8%.
- Bonds were also winners, with investors seeking safety as stocks sank, gaining on average +0.5% for the week. The difference in performance though among various types of bonds was significant this week as Midterm U.S. Government Bonds, some of the safest in the world, climbed +1.4%, higher quality corporate bonds were little changes, and riskier high yield bonds fell -2.4%. This week servers as a great reminder that clearly all bonds are not created equally.
Source: www.YCharts.com ; symbols: IEF, LQD, HYG
The Consumer Price Index (CPI) for May dropped -0.1%, slightly below economists’ expectations, and compares to the prior month’s -0.8% decline. Lower energy prices, including a -3.5% decline in the price of gasoline, was mostly offset by increased in the price of food and homes by +0.7% and 1.0% respectively.
Producer Prices, or wholesale costs measured by the Produce Price Index (PPI), rebounded in May, higher for the first time in four months, gaining +0.4% after falling -1.3% in April. Excluding food and energy prices, both higher for the month, the index was up just +0.1%. In spite of the year-over-year -0.8% drop in prices, there is hope that the disinflationary impact of COVID-19 is behind us.
Initial jobless claims, people filing for unemployment for the first time, came in at 1.54 million compared to a revised 1.9 million the week before. Continuing claims, or the total number of people receiving unemployment benefits, fell by 200,000 to 18.9 million. This is certainly an improvement but remains more than 10 times the level prior the pandemic.
Consumer Sentiment, measure by the University of Michigan, showed improvements in June with the index rising to 78.9 as compared to 72.3 the month before. Consumers views of both current economic conditions as well as their expectations for the future improved. Concerns remain though about the high level of unemployment and the potential for further viral outbreaks.
Upcoming Economic Reports
- Retail Sales
- Industrial Productions
- Housing Starts
- Jobless Claims
- Leading Economic Indicators