Market Commentary for the week ending August 22nd, 2020
- The S&P 500 reached a new all-time record high ending what is now the shortest bear market in history.
- Banking stocks suffer with expectations of significantly higher loan losses due to the economy's slowdown.
- The housing market is remarkably strong with both new housing starts and existing home sales surging beyond economists' estimates.
The Shortest Bear Market in History
This week the S&P 500 rallied to a new all-time record high fully recovering from the -33.9% loss suffered from the previous high earlier this year on February 19th to March 23rd. This ends what is now the shortest bear market in history lasting just 181 days from the peak in February to the full recovery this week. The next shortest was 2.5 times longer!
The accompanying table shows every bear market since the late 1920’s…every loss of -20% or more from the all-time high. Most bear markets tend to drag on for a longer period of time often resulting in longer recovery times.
83% is the difference in performance of the stock prices for retailers Target (TGT) and Kohl’s (KSS) in 2020. Target’s stock is higher for the year by +19.8% helped by a +13.1% rally this week on stronger than expected sales and earnings for the second quarter. Kohl’s (KSS) also reported better than expected second quarter results but said sales slowed down in July due to the uptick in COVID-19 cases driving its stock down -19.2% for the week and now lower by -62.9% for 2020. As you can see in the accompanying graph, these stocks were performing similarly early in the year pre-pandemic but since Target has far outperformed.
The banking sector is expected to incur $330 billion of cumulative loan losses due to the pandemic according to a report by Standard & Poor’s Global Ratings. At this point banks have only set aside $115 billion resulting in the expectations for muted earnings results in the coming quarters for banking stocks. The accompanying table shows some of the sector’s biggest losers this week.
The delinquency rate for mortgages climbed to 8.22% at the end of the second quarter compared to 4.36% in the first quarter according to the Mortgage Bankers Association. This was the biggest quarter over quarter increase in the history of this survey but there were positive signs that the flood of new delinquencies may be slowing.
This Week’s Performance Highlights
U.S. large stocks, as measured by the S&P 500, gained +0.8% for the week and is now higher year-to-date by +6.6%. Although this is a respectable gain for the week, of the 500 stocks in the index only 160 were higher while 340 declined. The largest stocks in the index, such as Apple (AAPL) adding another +8.2% to its price this week, fueled the overall index’s gain while many others lagged behind.
- The Dow Jones Industrial Average lagged behind the S&P 500 closing the week nearly unchanged while the NASDAQ resumed its 2020 rally jumping +2.7%. Stocks in the technology sector, 1 of only 3 sectors higher for the week, climbed +3.6% fueling the NASDAQ’s move.
- Small U.S. stocks suffered a meaningful decline of -1.6% leaving them down -6.0% for the year. This disappointing performance comes after a 4-5 weeks of relative strength.
- International stocks were mixed with developed country stocks off a bit down -0.6% on average with Eurozone countries, including Spain’s -2.2%% loss, down more than other regions around the world.
- Emerging markets were slightly higher on average gaining a small +0.1% with China’s market jumping +2.6% while Russia, South Korea, Thailand, and Brazil’s markets all fell -3.5% or more.
- The pullback in gold from its record high continued but subsided this week off just -0.3%. This safe-haven precious metal is still higher by +27.4% for the year in spite of being -6.1% below that all-time high hit earlier this month.
- Bonds recovered roughly half their losses from the prior week, the worst loss since March, gaining +0.5%. The yield on 10-Year U.S. Treasuries dropped to 0.636% but is still meaningfully above the low hit earlier this month of 0.508%.
- Commodities inched higher by +0.3% while real estate stocks slipped -0.6% with no headlines having much impact on these investments.
Existing Home Sales surged nearly 25% compared to the prior month coming in at an annual rate of 5.86 million. This far exceeded economists’ estimates and is back above pre-pandemic levels. This surge in sales is being explained by desires by homeowners for more space, living closer to family, and living outside the city due to the new normal of COVID-19. Mortgage rates hovering around record lows is also making homeownership more affordable.
Another sign of the housing industry’s strength was the jump in housing starts to 1.496 million annually exceeding estimates by a wide margin. This volume of construction is 22.6% more so than the month before and 23.4% higher than the same month a year ago. This overall number is a combination of both single-family and multi-family units with single-family units gaining just 8.2% while multi-family, buildings with 5 or more units, rocketed higher by +56.7%.
After dipping below 1 million last week, new weekly initial jobless claims filed with states moved higher this week coming in at 1.11 million which was well above economists’ estimate of 910,000. When including those also filing via the separate federal programs, claims came in at 1.43 million. The total number of unemployed collecting benefits from states, known as continuing claims, is at a new pandemic low of 14.84 million. There is a lot of uncertainty and noise in these numbers due to Trump’s order to provide a $300 per week federal payment and questions of whether or not the economic recovery will persist with increased numbers of COVID-19 cases.
Both the manufacturing and services sector resumed growth in July according to a survey published by HIS Markit.
Upcoming Economic Reports
- New Home Sales
- Jobless Claims
- Q2 Gross Domestic Product (GD) revision
- Consumer Spending
- Durable Goods Orders
- Consumer Sentiment Index