Economic Data Watch and Market Outlook
The S&P 500 after emulating the Little Engine’s catch phase of “I think I can”, finally achieved a new all-time high on its fifth attempt of 3389.78 last Tuesday. The miraculous recovery of the S&P 500 from its nadir of 2237.4 of March 23, has seen the index rally by over 50.0% in just 103 trading days. Compare this recovery versus the other 28 bear market retracements since 1928, and the average time period to regain 100.0% of loses took on average four years. The rally has been powered by the famous FAANG stocks, which are up year to data approximately 49.0% as a group versus only 6.47% for the S&P 500. The star performer of the FAANG’s has been Apple, which became the first US company in history to exceed a market cap of $2 trillion. How large is Apple’s market cap in comparison to the rest of the market? At a $2 trillion market cap, Apple is just below the Russell 2000’s market cap of $2.2 trillion. Despite the tensions between the US and China, rising global cases of COVID-19 and historic declines in global GDP, markets continue to surge higher on talks of further fiscal stimulus from the U.S. and ECB, as well as hopes for a coronavirus vaccine based on recent updates on drug trials from Pfizer, BioNTech and Johnson & Johnson.
As we enter next week’s trading sessions, the market’s attention will be fixated on the progress the White House and Congressional Democrats can make on a fifth COVID-19 stimulus package. After unsuccessfully reaching a comprise on a new rescue bill, members of Congress and the White House will be reviving discussions next week in D.C. returning early from their traditional summer recess. Hopes have risen for a new deal, as House Speaker Nancy Pelosi stated she was willing to cut the House stimulus bill ($3.1 trillion) “in half” to make a deal with Republicans. We will also be winding down the earnings season with reports scheduled for retailers such as Best Buy, Dollar General and Nordstrom, as well as Hormel Foods, salesforce.com and HP Inc.
In turning to the coming week’s economic calendar, a heavy slate of data releases will be dominated by U.S. housing results, personal spending, and the personal consumption expenditures index. Starting off on Tuesday, the July New House Sales are projected to increase by 1.2% to 785,000 units on a seasonally adjusted annual rate. Record low mortgage rates should continue to support home sales. The Conference Board Consumer Confidence Index in August is expected to improve by 0.4 points to 93.0.
Durable Goods orders on Wednesday is estimated to have jumped in July by 7.0%. The solid rise is expected to be driven by orders for civilian aircraft, which was negative in June due to order cancellations.
On Thursday, July’s Pending Home Sales index is projected to advance by 1.0%, following strong reports in May and June. With mortgage rates remaining below 3.0%, housing data should remain firm for a while.
Consumer Spending for July being released on Friday, is estimated to have increased by 1.6%. Spending has continued to recover from the COVID-19 induced plunge, but spending data has somewhat plateaued. The PCE inflation reading is expected to rise in July, following the recent increases seen in CPI and PPI. The PCI Price Index is expected to rise in July by 0.5%, with the index up 1.1% over a yearly annual basis. Personal income is estimated to have risen by 0.3% in July along with a similar jump in disposable income.
The Week In Review
U.S. Equities
U.S. equity markets were higher on the week as the S&P 500 reached a new all-time high, as technology stocks, hopes for a COVID-19 vaccine and new US stimulus bill pushed equities higher.
- Dow Jones +0.09% MTD +5.91% YTD -0.59
- S&P 500 +0.77% MTD +3.99% YTD +6.47%
- Russell 2000 -1.59% MTD +4.96% YTD -6.13%
Drivers: I) The housing market in the U.S. continued to provide a tailwind for the economic recovery, as Existing Home Sales surged by 14.7% in July, to 5.86 million on a seasonal adjusted annual rate. This sharp rise has now pushed sales above pre-COVID levels and was the best reading since 2007. This housing trend should continue, supported by historically low mortgage rates and pent up demand after purchases were delayed by COVID.
II) The Markit Manufacturing PMI in July remained in expansionary territory, rising from 50.9% to 53.6, while services also improved from 50.3 to 54.8. The improvements were led by a rise in new orders and the employment indexes for both reports. The strong reading in the services PMI is a bit divergence from a recent subpar reading from the New York Fed’s services survey released early last week. Consumer demand will require close attention, to see if the recent recovery from the COVID-19 shutdown will continue.
III) July Housing Starts and Permit exceeded estimates, continuing the solid gains seen across the housing sector in recent months. Starts for the month rose by 22.6% to 1.496 million on a seasonal adjusted annual rate (saar), while permits surged by 18.8% to 1.495 million (saar). The jumps in data were seen for both single-family and multi-family units, and though below pre-COVID levels, they have seen sizable jumps over the past few months.
IV) In August, the Empire State manufacturing survey fell from 17.2 in July to 3.7, which was below expectations. A number of indicators are showing the economy is slowing, and this regional report supports that premise. Underneath the report, weakness in August was seen in a drop in the new order index to -1.7 after a solid reading in July of +13.9.
V) Equities Month to Date are higher with Small-Cap, Value, Technology, and Information Technology leading equity price performance. The laggards for the period are Mid-Cap, Growth, REITs, and Utilities.
Capitalization: Large Caps +0.87% (YTD +4.00%), Mid-Caps +1.64% (YTD -2.22%) and Small Caps +4.96% (YTD -6.13%). Style: Value +3.03% (YTD -17.54%) and Growth +2.72% (YTD +1.14%). Sector Groups: Technology +6.77% (YTD +29.54%), Information Technology +6.51% (YTD +27.98%), Consumer Discretionary +6.73% (YTD +17.39%), Communication Services +3.94% (YTD +10.89%), Healthcare +1.22% (YTD +5.77%), Consumer Staples +2.51% (YTD +3.43%), Materials +2.53% (YTD +1.98%), Industrials +6.58% (YTD -5.06%), REITs -1.01% (YTD -5.87%), Utilities -2.41% (YTD -6.45%), Financials +1.11% (YTD -19.80%) and Energy +0.00% (YTD -37.83%).
European Equities
The MSCI Europe Index was lower last week as investors were concerned about the recent rise in global COVID-19 cases, and a disappointing rise in Weekly Jobless Claims in the U.S.
Drivers: I) Euro-zone composite PMI in August dropped by 3.3 points to 51.6, below the Street forecast of a rise of 1.1 points to 56.0. Since the outbreak of COVID-19, PMI data has been highly volatile , as the survey fell 38 cumulative points during March and April due to imposed government lockdowns. The re-opening of economies led to a strong 41 point cumulative jumped from May to July. The August drop brings activity back to pre-COVID levels.
II) In July, the euro-zone core inflation rate rose by 0.4% to a 1.2% annual rate. But when you exclude the highly volatile apparel data, core inflation comes in around 0.6% over a yearly basis, which is 0.2% lower than the reading in June. Not surprisingly, service price inflation after excluding items such as airfares and accommodation services dropped 0.1% to 1.4% since the beginning of the year.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was lower by -1.20% for the week (MTD +2.22% YTD -7.43%).
Asian Equities
Asian equity markets fell on the week, after Fed minutes showed the central bank was uncertain about the US economic recovery. The DJ Asia Index declined by -1.21% for the week, (MTD +2.98% YTD -5.66%).
Drivers: I) Export activity in Taiwan has remained steady despite the sharp Q2 global recession, as July orders jumped by 12.4% on an annual basis. This rise in orders confirm a solid recovery is in place as the global economy is in the midst of a synchronized recovery. The technology sector has stood out in recent months, as tech orders surged by 5.8% m/m in July. Demand for non-tech products which have been muted in recent quarters, showed signs of improving, as non-tech orders jumped by 10.6% m/m in July after rising 9.1% in June.
II) In Japan, GDP for Q2 2020 saar plunged by 27.8% quarter over quarter, which was in line with Street expectations. The historic contraction, which was the worst since 1955, was due primarily to the sharp decline in consumption due to the state of emergency implemented by Japan’s government to contain the spread of the COVID-19 pandemic. Consumption dropped -17.8 points and exports fell by -11.4 points.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei fell by -1.58% (MTD +5.56% YTD -2.03%), the Hang Seng Index was lower by -0.27% (MTD +2.11% YTD -10.48%) and the Shanghai Composite advanced by +0.61% (MTD +2.14% YTD +10.84%).
Fixed Income
Treasury yields fell last week as US weekly jobless claims unexpectedly rose, and the Euro-zone Composite PMI came in below Street estimates raising a red flag over the region’s economic recovery.
Performance: I) The 10-year Treasury yield was lower last week ending at 0.636% up from 0.709%. The 30-year yield dropped last week finishing at 1.341% falling from 1.448%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose +0.27% last week, MTD -0.54% and YTD +7.14%. The Bloomberg Barclays US MBS TR was lower by -0.01% last week, MTD -0.01% and YTD +3.68%. The Bloomberg Barclay’s US Corporate HY Index was up by +0.05% for the week, MTD +0.14% and YTD +0.85%.
Commodities
The DJ Commodity Index was higher last week by +0.70% and is up month to date +4.91% (YTD -3.41%). The commodity index rose on the week, as lumber prices continued its strong rally on upbeat US housing data and industrial metals resumed their assent due to rising demand from China.
Performance: I) The price of oil rose last week by +0.04% to close at $42.25 and is higher month to date by +4.50% (YTD -30.80%). Oil prices were essentially flat on the week, as concerns grew over the state of the global economic recovery due to the continued rise in new COVID-19 cases.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was higher by +0.10% ending at 93.20 for the week (MTD -0.28% YTD -3.31%). The USD was slightly higher due to rising US/China tensions and concerns over the fragility of the global economic recovery.
III) Gold fell for a second consecutive week as the recent rise in the USD took some luster off of the precious metal. Gold was lower by -0.32% last week, falling to $1947.4 (MTD -2.33% YTD +27.86%).
Hedge Funds
Hedge fund returns in August are higher with all of the core strategies Equity Hedge, Event Driven, Macro/CTA, Relative Value and Multi-Strategy in positive territory.
Performance:
- The HFRX Global Hedge Fund Index is higher at +0.90% MTD and up +1.16% YTD.
- Equity Hedge has advanced by +1.72% MTD and is lower by -3.90% YTD.
- Event Driven is up MTD +0.80% and is up YTD +3.35%.
- Macro/CTA has risen by +0.02% MTD and is higher by +1.07%
- Relative Value Arbitrage is higher by +0.75% and is up +3.93% YTD.
- Multi-Strategy is up MTD by +0.63% and has risen by +3.57% YTD
Data Source: Haver Economics