Market Commentary for the week ending July 3rd, 2020
- Stocks rallied around the world with the U.S. market exhibiting a broad-based rally with nearly all stocks higher.
- The June employment report showed another surge in re-hiring.
- Consumer Confidence surged with expectations of significant improvement in the economic condition by the end of the year.
Second Quarter Highlights
The second quarter was one of the best on record for investors in stocks while the economy suffered one of its biggest collapses in history. Here are some of the quarter’s highlights:
- The S&P 500 gained +20.5% in the second quarter bested only 3 times since 1948. During the first 50 days after hitting its low, it staged a rally not topped since the 1930's.
- The NASDAQ turned in its second best quarter in history up +30.9% and crossed 10,000 for the first time.
- The Dow rallied more than +20% in three days following its March 23rd low BEFORE the second quarter even got started! It posted a +17.8% for the quarter.
- The biggest losers among the 500 stocks in the S&P 500 were energy and cruise lines followed by airlines, casinos, and some retailers. The volatility of these individual stocks is nearly unprecedented. As an example from the table below, Apache fell -88% from its 2020 peak to its 2020 low point then subsequently rallied +341 and remains lower for the year by -48%.
- Oil prices experienced an unheard of move below zero for a brief period of time as supplies swelled and storage capacity shrank. Prices quickly recovered that same week to close above $17 per barrel and have since traded above $40 but is still off sharply from $61 at the start of the year.
- Second quarter GDP, due to be reported July 30, is forecast to have fallen at an annual rate of roughly -30% making it one of the biggest declines in history.
- The Federal Reserve and Congress provide record levels of support to both the economy and markets including lowering interest rates, providing loans to companies, and increasing unemployment benefits to those losing their jobs.
- Retails sales, a massive component of total economic activity, plummeted in April then surged in May as the economy began to reopen. Since then there are some renewed fears that the recovery may stall as the number of coronavirus cases increase.
China’s stock market has hung in there in 2020 down just -4.2% but its longer term performance has been miserable. It’s closing price this week was first reach 4,665 days ago on September 21, 2007 just before the 2008 Financial Crisis. As the accompanying graph shows, China’s market has moved mostly sideways for years while the S&P 500 more than doubled during the same period.
The organizers of the Wimbledon tennis tournament, cancelled for the first time since World War Two, are set to receive a payout of $141 million from a pandemic insurance policy according to Forbes. They have been paying $2 million per year for 17 years to carry this coverage. Interesting to note is that investing that $2 million each year in the S&P 500 would have produced an ending balance of $85.9 million.
This Week’s Performance Highlights
U.S. markets experienced one of the most broad-based rallies of the year with 478 of the 500 stocks in the S&P 500 moving higher. As the following table shows, the very popular “FAANG” stocks generally had a great week and have sometimes seemed to be the only stocks doing well. This week’s participation in the bull market though by so many stocks is certainly considered to be positive news possibly pointing to the underlying strength in the market not being entirely dependent on just a few stocks’ performance.
- Nearly all U.S. stocks rallied with large U.S. stocks higher by +4.1%, as measured by the S&P 500, and small U.S. stocks up +4.2%. All 11 sectors gained ground with the financials turning in the worst performance but still higher by +1.7% while materials, such as mining and chemical stocks, were the best up +5.6%.
- FedEx (FDX) was the best performing stock in the S&P 500 jumping +19.5% after reporting much better than expected revenue and earnings for the quarter. The company is benefitting from the increase in ecommerce but its stock remains off its early-2018 all-time high by more than -40%.
- International stocks were higher as well but lagged behind U.S. markets with developed countries gaining +2.1%. This average return for developed markets masks relatively big differences in performance among the three major regions as illustrated in the below graph.
- International emerging markets turned in a strong performance up +3.6%. The turmoil between Hong Kong and China had little impact on their markets this week, up +2.6% and +3.2%, respectively. Although it was a good week for Chinese stocks and they are only off -4.2% for the year, as discussed above, they have performed poorly for more than a decade.
- Real estate stocks jumped higher by +5.1% helped by an +11.3% surge in the shares of Simon Property Group (SPG), the largest in the sector by a wide margin, on renewed hopes that shopping malls will continue to see increasing traffic in a reopening economy.
- Commodity prices jumped as well gaining +4.9% on higher oil prices as demand continues to recover from its March lows.
- The safe havens of both gold and bonds only inched higher, up +0.3% and +0.2% respectively, as investors instead bid up the prices of generally higher risk assets.
Employers hired 4.8 million employees in June dropping the unemployment rate to 11.1% from 13.3% according to the June Employment Report. The job gains exceeded expectations of 3.7 million and adds to the previous month’s 2.7 million jobs added. The leisure and hospitality sector alone accounted for more than 2 million of the jobs added in the month followed by retail added 740,000. Only the energy sector continued to lose jobs. Although this June report is a record number of jobs added it still leaves about 15 million more people unemployed today than at the start of the pandemic.
The weekly Initial Jobless Claims report shows a slightly different story with 1.43 million new first-time claims. More interesting is the continuing claims number up 59,000 from the week before to 19.29 million.
Consumer confidence jumped much more than economists had expected coming in at a 3-month high of 98.1 compared to a revised 85.9 the month before. One of the sub-components of the survey measuring expectations 6 months out shows consumers expect COVID-19 to be of little concern by year’s end. Although this is a strong and welcomed rebound from the recent lows, it remains well below the pre-pandemic level of 132.6 in February.
The rising trend in home prices seems to have stayed in place in spite of the pandemic with the Case-Shiller Home Price Index of 20 leading cities for April showing a +0.9% increase from the prior month. Year-over-year prices are up +4.0%.
ISM Manufacturing Index shows manufacturers fired up production in June with the index coming in at 52.6% (anything above 50% indicates growth). This was better than expected and well above the prior month’s reading of 43.1%. 13 of the 18 industries tracked by the index showed growth.
Upcoming Economic Reports
- ISM Nonmanufacturing Index
- Initial Jobless Claims
- Producer Price Index