US Stock Market Dips Amid Rising COVID Cases, Big Tech Concerns, and Weak USD
Equities had a mixed week last week as investors continued to grapple with the stalling economic recovery due to rising COVID-19 case counts and deaths across the U.S.
Add to that a delay on the next U.S. stimulus package, concerns around the upcoming antitrust hearing on Big Tech, and the weakest levels of the U.S. dollar (USD) since the start of the year, and it’s little wonder domestic equities underperformed (SPX -0.3%). International developed markets and emerging market equities both posted gains on the week, rising 0.4% (MXEA) and 0.6% (MXEF) [Figure 1].
Value outperformed growth again last week
For the second straight week, value stocks (SVX) outperformed growth (SGX) by 77 bps [Figure 1], the latter driven down by the weakness in tech shares (CCMP -1.3%). While this likely reflects investors adjusting their positioning around earnings and not the start of a new trend, it’s something that we, along with the market, will be paying close attention to.
High-frequency data is proving to be a potentially useful leading indicator for more traditional measures of economic activity. The slowdown in high-frequency data for the U.S. recovery is now starting to make its way into traditional data, like unemployment and manufacturing activity.
After the prior week’s miss on consumer confidence, last week’s jobless claims rose for the first time since late March. PMI business surveys also came in below expectations. This will likely filter through into retail sales and non-farm payrolls in a few weeks. But with things moving as fast as they are, market participants will likely have moved on by then, guided instead by high-frequency data and COVID-19 case counts.
OpenTable restaurant reservations data, for example, initially rocketed higher as lockdowns were lifted, rebounding from being down 90% of where they were last year to being only down 70%. But since late June, corresponding to the rise in COVID-19 cases, reservations have flatlined at -60% from where they were the same time last year. [Figure 2].
European leaders agree on stimulus package
Last week the 27 members of the European Union (EU) agreed to a continent-wide stimulus package, funded by borrowing at the EU level, to combat the virus-induced slowdown. This is a big step toward political integration that should not be ignored. The Euro closed at its highest level since September 2018, also helped along by stronger-than-expected European PMI readings last week as Europe rebounds faster from lockdowns.
U.S. unemployment insurance benefit expires
Politics in the U.S. have been less supportive, however. The $600 per week supplemental unemployment insurance benefit expired last week and the federal foreclosure and evictions moratorium, after being extended an additional two months, is now set to expire August 31st. But Republicans have not been able to agree on a new stimulus bill to frame their negotiations with Democrats, who passed their own bill weeks ago.
With the August congressional recess looming, it’s now a race against the clock to get stimulus money into consumers’ hands to support spending — something that’s been a key factor in our stronger recovery thus far. With spending having returned to pre-COVID levels, the U.S. consumer has, by and large, been the brightest and most resilient measure of the recovery in the U.S. If consumer resiliency wanes and we can’t sustain similar levels of spending in the future, expect the market to react.
Earnings have been strong, not good enough
Earnings season continues in the U.S. This week is the biggest week, with nearly 45% of the S&P 500 by market cap reporting. So far, the key takeaway has been that expectations were likely too low for the more downtrodden cyclical/value names. And while market leaders’ earnings have been strong, they haven’t been good enough, and investors have generally punished these stocks.
So it will be important to watch how this dynamic plays out this week, especially with some of the biggest tech names like GOOGL, AAPL, AMZN and FB reporting.
Breakeven inflation rates spur stagflation fears
Government bond yields fell last week and the curve flattened. The 2-Year was flat as a pancake while the 10-Year and 30-Year fell 4 and 10 basis points (bps), respectively. Credit traded well last week, with spreads on investment-grade debt down 1 bps and on high-yield down 10 bps. August typically shows a seasonal lull in corporate credit issuance, which should tighten spreads and flatten the U.S. Treasury curve. Of course “typical” isn’t the word we’d choose to describe the year 2020.
While rate volatility is on the floor (the MOVE Index is at year-to-date lows, down almost 75% from its March peak), one not-so-dull area is breakeven inflation rates. Market-based expectations for future inflation have been rising, causing real yields to fall and investors to worry that rate markets may be signaling a stagflationary outlook.
If long-end rates were rising simultaneously, we might share that concern. But the 30-Year Treasury Yield is at a 3-month low [Figure 3], so this likely reflects a normalization in the less liquid inflation market and the strength of the Fed’s control over Treasury yields.
Gold soars against weak U.S. dollar
The move in real rates is, however, having effects in the precious metal and currency markets. On Friday, the spot price of gold (XAU) closed at an all-time high of $1902 against the USD (BBDXY), which is at its weakest level since the start of the year [Figure 4].
FOMC to meet but rates not going higher
The Federal Open Market Committee (FOMC) meets again this week and, spoiler alert, rates aren’t going anywhere for some time. Federal Reserve Chairman Jerome Powell will likely hammer this message home in the press conference, but Fed-watchers will be picking apart his answers on their policy framework review and the prospects for yield curve control. We think policy changes by the Fed are unlikely for the time being. Bottom line: interest rates are not going higher!
Tensions with China persist
Tensions with China flared again last week in a tit-for-tat fashion, as both sides closed minor embassies and Secretary of State Pompeo stopped just short of calling for regime change in China. This fits the recent pattern: the U.S. ratchets pressure and China responds but doesn’t escalate. It’s not in either side’s interest to dramatically push this dynamic at the moment, but we’ll be watching the currency markets, and the election calendar, for signs otherwise.
What to watch next
The market will continue to keep an eye on COVID-19 case counts, hospitalizations, and mortality rates—and any subsequent or expected impact on activity levels not just in those regions where the virus is surging but across the country, due to other states taking preemptive steps to control the spread of the virus. Likewise, the market is likely to continue to respond in kind to any positive vaccine or treatment progress, especially as potential vaccines enter Phase 3 clinical trials.
This will be the biggest week of corporate earnings season with nearly 50 percent of the S&P 500 by market cap reporting, including big tech like Google (GOOGL), Facebook (FB), Amazon (AMZN) and Apple (AAPL).
High frequency data
Because it’s already proven valuable as a potential leading indicator, high-frequency data like Apple Mobility data, restaurant reservations, and new job postings will continue to be watched closely by market participants. While a stalling out of activity is expected, any surprise to the upside or downside will get the market’s attention.
On Wednesday, as part of an ongoing investigation in anti-competitive practices, a congressional antitrust hearing is scheduled with executives from Facebook, Google, Amazon and Apple. We don’t expect much will come of this, at least not yet. A full report on the investigation isn’t due until late summer or early fall.
On Thursday, initial jobless claims are expected to tick up slightly higher. The thing to watch for is any surprise in the data. If claims come in higher-than-expected, it could prompt a fear-based response from investors. And it would only strengthen the case for more stimulus now, not later.
On the heels of the consumer confidence miss two weeks ago, and with high-frequency data showing significant signs of stress, Friday’s release of the University of Michigan Confidence Sentiment Survey will take on new importance.
The U.S. consumer has been the bright spot in the recovery, with consumers seemingly back to spending like normal even if by other economic measures, things are anything but normal. Can consumers remain resilient in the face of new challenges posed by the surge in COVID cases, a rise in jobless claims, or a potential failure to pass additional stimulus? A significant drop in consumer spending would likely have a detrimental impact on markets. If that happens, it would be a catalyst to action, politically speaking.
Q2 GDP in the US and Europe
Q2 GDP for the U.S. and Europe come out Thursday and Friday, but it’s already ancient history. High-frequency data and other forward-looking data takes precedence.
David V. Thomas, Jr. offers products and services using the following business names: Vaughn Asset Advisory, LLC – insurance and financial services | Ameritas Investment Company, LLC (AIC), Member FINRA/SIPC – securities and investments | Ameritas Advisory Services (AAS) – investment advisory services. AIC and AAS are not affiliated with Vaughn Asset Advisory, LLC.
Products and services are limited to residents of states where the representative is registered. This is not an offer of securities in any jurisdiction, nor is it specifically directed to a resident of any jurisdiction. As with any security, request a prospectus from your representative. Read it carefully before you invest or send money. A representative will contact you to provide requested information. Representatives of AIC and AAS do not provide tax or legal advice. Please consult your tax advisor or attorney regarding your situation.
The views stated in this letter are not necessarily the opinion of Ameritas Investment Company, LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change with or without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. Past performance does not guarantee future results. There is no guarantee that any investment strategy will generate a profit or prevent a loss. Investing in the securities markets involves risk, including loss of principal. The commentary provided should not be considered or used as a substitute for individual investment advice.
All market data and economic data has been provided by Horizon Investments & Bloomberg
Copyright 2020 Vaughn Asset Advisory, LLC