Economic Update 5-26-2020

• Economic news remained dreary, with expected poor results for home sales, leading economic indicators, and manufacturing—although there appear to see some signs of marginal improvement in sentiment for the latter.
• U.S. and foreign equity markets rose as investors looked ahead to progress on a Covid vaccine, and continued extreme stimulus measures in the meantime, while emerging markets were less positively affected, due to deteriorating U.S.-China relations. Bonds were mixed as rates rose, yet corporate credit spreads tightened. Commodities gained as the price of crude oil and natural gas spiked last week with hope for stronger demand sooner than later.

U.S. stocks gained last week, with optimism on several fronts that gave investors hope following weeks of record-breaking negative economic news. Appearing on the popular CBS news program 60 Minutes the prior Sunday evening, Fed chair Jerome Powell’s announced that the Fed had not run out of ammunition ‘by a long shot,’ and there’s really no limit to what could be done through government lending programs. Additionally, Monday morning’s announcement by Moderna that a Covid vaccine produced antibodies (the primary objective) in phase I of a trial buoyed market confidence for a quicker exit out of the pandemic. This is was coupled with government pledges of billions of dollars to firms involved with vaccine development. However, the data not yet sufficient enough to declare a victory over the virus—which will require additional testing through subsequent FDA phases.

On the negative side, U.S.-China trade rhetoric has ramped up again, with blame being assigned for the Covid-19 origin story, and lack of medical transparency afterward. In a series of enhanced actions, the administration tightened restrictions on Chinese telecom Huawei, in terms of who the firm could do business with and level of technology sharing (particularly important in the growing 5G segment). Additionally, the Senate imposed legislation requiring firms controlled by foreign governments to be delisted from U.S. exchanges.

The gradual U.S. economic re-opening does seem to be making a difference in economic data. Although rates of change versus a year ago reached levels of -90% to nearly -100% in some segments, some green shoots are appearing, with activity seeming to improve each week. This was seen by the sharp rally in small cap stocks, which are assumed to be among the hardest-hit. By broader S&P sector, industrial and energy gained over 6%, followed by a recovery in real estate, while defensive health care and consumer staples trailed the pack.

Foreign stocks broadly earned similar returns to those in the U.S., helped by a weaker dollar in Europe and the U.K. Japanese and emerging market stocks lagged with minimal gains. A 500 bil. euro recovery fund for the next seven years, backed by sometimes-economic opponents Germany and France, boosted sentiment, although the stimulus nature solicited pushback from some EU members wanting loan-only provisions. Interestingly, despite downplaying the idea in recent weeks, policymakers in the U.K. are now actively reviewing the prospect of negative interest rates. Emerging markets, especially in Asia, were negatively affected by soured U.S.-China trade relations, as well as additional crackdowns on Hong Kong by China.

U.S. bonds rose slightly, mostly as spreads for corporate credit contracted, which offset small price declines in treasuries. High yield and senior bank loans gained strongly, followed by a less dramatic gain for investment-grade debt. Foreign bonds gained along with a weaker dollar, and for emerging markets, a continued return to risk-taking.

Commodities gained last week on the heels of a continued recovery in energy, while industrial metals also gained some ground. The price of crude oil rose by over 10% to just over $33/barrel. This came along with strong broader sentiment for risk assets as investors peeked around the corner for an end to the Covid-based downturn, and a recovery in energy commodity demand, also seen by a spike in natural gas prices last week.

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.                                                                   

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. 

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