Economic Update 7-13-2020

• A light calendar of economic data for the week included a record increase in non-manufacturing, lower producer prices, and stronger job openings.
• Global equity markets rose last week, as stronger economic data outweighed mixed results of pandemic infections around the world. Bonds fared well with credit spreads contracting in the U.S., and weaker dollar helping foreign bonds. Commodities were generally higher due to strength in industrial metals, while crude oil prices were little changed.

Stocks rose last week as optimism for improvement over the depths of shutdowns a quarter ago, despite the resurgence in cases throughout the Sun Belt. This is due to stronger economic growth, per the result of national reopenings (now at risk those same locations), as well as vaccine progress that appears to moving at a faster pace than expectations. Updated news about Gilead’s controversial remdesivir Covid treatment, showing that it substantially reduced death rates, lifted spirits by the end of the week.

By sector, communications, consumer discretionary, and technology led the way last week with gains of 2% or more. Energy lagged with nearly a -5% decline.

Earnings season for Q2 is scheduled to begin next week, although expectations are lackluster to say the least. As with estimates for economic growth overall, earnings decline expectations year-over-year fall in a broad range of -40% to -60%. On the positive side, in conjunction with the economy, earnings for 2021 look to be 30-50% higher—albeit a very wide and imprecise measurement at this point.

Foreign stocks showed positive returns broadly, with Europe and Japan ending the week with similar results, while the U.K. lost a bit of ground. Emerging markets outshined developed, led by China, up nearly 10% for the week alone, followed by Brazil, despite continued challenges in the latter with Covid infection rates.

Much has been made of the resurgence in Chinese stocks over the last few weeks, due to a lower Covid caseload, but also, it appears, strong government stimulus. Specifically, government rhetoric endorsing equities in state-owned publications fueled the recent surge in prices. Due the current pace of rising infection rates in the U.S., the working assumption is that the Asia-Pacific region will emerge from the pandemic more quickly and in stronger condition than the rest of the world. Cheaper starting valuations for emerging market stocks helped this rotation somewhat.

U.S. bonds were up slightly last week, due to long-term treasury rates falling and contracting credit spreads for corporate debt; however, bank loans declined. A weaker dollar lifted foreign developed market sovereign debt up nearly a percent, as were local-currency emerging market bonds.

The Federal Reserve now owns nearly $7 bil. in individual corporate bond ETF assets, and $3 bil. in individual bonds. Then again, issuance was also robust, with $146 bil. in high yield alone for Q2. According to JPMorgan data, however, the default rate for high yield rose to 6.9%, which is a 10-year high. Over the past year, half of defaults have been in the troubled and heavily-leveraged energy sector.

Commodities gained generally across the board, with help from a weaker U.S. dollar. Industrial metals benefitted from reports of stronger Chinese activity, precious metals continued to show strength, in addition to gains in natural gas prices. The price of crude oil fell slightly to around $40.50/barrel.

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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