Equity markets mixed last week as vaccine optimism offsets virus outbreaks

COVID-19 continues to dominate the headlines, as hotspot states struggle to control their outbreaks. Democratic Representative of Florida Donald Shalala called his state’s situation “totally out of control.” Despite the viral surge, vaccine optimism drove some sectors of the market higher as multiple vaccine candidates showed breakthroughs in development.

Equity markets have mixed week

Equities were mixed on the week, led by U.S. small caps (RTY 3.6%), U.S. industrials (DJI 2.3%) and international developed markets (MXEA 2.2%). The S&P 500 notched a bit higher as well (SPX 1.3%). Tech reversed its bullish trend, however, ending the week firmly lower (NDX -1.8%). Emerging markets also struggled (MXEF -1.2%) [Figure 1].

Reasons for tech underperformance murky

For the first time in six weeks, value and cyclical sectors outperformed growth and technology. It’s not entirely clear what drove tech underperformance last week. Some suggest investors were in profit-taking mode, while others think the tech selloff was a mechanism to shore up investment capital for sectors with more runway.

What is certain? In a more resilient rally, all sectors would participate, something we haven’t seen happen since the March 2020 lows.

Wall Street kicks off earnings season

Bank earnings were largely positive last week, as firms posted record trading and investment banking revenues. Some, like Goldman Sachs, reported significant capital reserve buildup, a possible indicator of COVID-driven defaults in the near-term. The season continues this week with technology, as Microsoft reports on Wednesday.

High-frequency economic indicators deteriorate

Just like the week prior, we observed a significant deterioration in high-frequency economic indicators last week. Data from analytics software company Burning Glass Technologies, which provides real-time data on job growth and labor market trends, showed job postings declined by another 4% for the week ended July 17th, falling nearly 30% from the week ended June 27th [Figure 2].

Reasons to be optimistic about the future?

More stimulus

A fifth coronavirus relief package is likely on the horizon. The Democratic-controlled House of Representatives passed a $3 trillion bill in May, but the Republican-controlled Senate hasn’t taken up the package. Instead, Republicans are expected to bring forth a ~$1 trillion proposal in fiscal support. Consensus is that this will happen before the end of the month, when the $600 per week supplement to unemployment insurance payments is set to expire.

U.S. retail sales higher-than-expected

Economic data was also largely positive last week, as U.S. Retail Sales for the month of June came in higher than expected at 7.5%, versus 5.0% expected [Figure 3]. Sales totaled $524.3 billion in June, up from $487.7 billion in May and nearly back to pre-COVID levels. That said, we may see sales growth flatten in July due to the slowing of reopening momentum in COVID-19 hotspots.

Consumer sentiment slips, but 12-month expectations remain strong

Consumer sentiment dampened the V-Shaped recovery narrative a bit last week. The University of Michigan Consumer Sentiment Index returned 73.2%, lower than the 79.0% expected [Figure 4]. That said, 12-month consumer expectations are at their highest level in 8 years, reflecting overwhelmingly positive long-term expectations.

Fixed income markets relatively quiet

Government bond yields and the yield curve were mostly flat last week. The 2-Year and 30-Year U.S. Treasury bond each fell by ~1 basis point (bps) for the week, and the 10-Year fell by 2 bps. As government yields remain range-bound, our expectations for the future are unchanged. The Fed is likely to keep yield curve control as an unused policy in their toolbox for now.

Spreads for investment-grade (IG) credit and high-yield (HY) credit spreads fell again, tighter by 2 bps and 40 bps, respectively.

Fed balance sheet expands by $39 billion

The Federal Reserve’s balance sheet expanded over the past week, the first such expansion in a month, by around $39 billion (+0.5%). Main street lending facility was unchanged, while the Corporate Credit Facility expanded by ~$8 billion (+3.5%).

The New York Fed received no bids on their overnight repo facility on July 17, 2020, meaning that inter-bank lending is functioning well or that most banks are meeting reserve ratio requirements without resorting to the Fed. This should come as no surprise, as the banks that have already reported earnings disclosed massive capital reserves.

Dallas Federal Reserve President Kaplan said that he is open to overshooting the inflation target, stating that “we should keep rates lower for longer.”

What to watch next

Earnings season continues

Bank earnings were largely positive last week as firms posted record trading and investment banking revenues. Earnings continue this week with tech companies starting to report. Microsoft (MSFT), which makes up 6% of the S&P 500, reports on Wednesday.

Year-to-date strong performers like MSFT and other tech and growth-oriented names tend to have higher earnings expectations than the broader market. This week, we’ll begin to see if they can deliver on those expectations. If they don’t, due to their weight in passive indices, it may have implications on value vs. growth performance going forward.

Jobless claims

This week’s initial jobless claims out on Thursday are expected to remain steady at approximately 1.3 million. While weekly initial claims are significantly down from their peak in late March, the still-historically-high weekly figure points to a somewhat tentative recovery. That said, overall jobs and economic trends should remain more important than week-to-week figures.

Eurozone consumer confidence

The European Commission is expected to release its consumer confidence survey for July on Thursday. Confidence climbed sharply in June and consensus is for a further increase over last month, as the number of COVID-19 cases continues to decline across Europe.

Flash PMIs

On Friday, Markit Manufacturing and Services PMIs are expected to come in over 50%, indicating improving sentiment on recovery.

 

To download a copy of this commentary and the chart of the week, click the button below.

Download our Market Summary

 

To discuss how we can empower you please contact us at 866.371.2399 ext. 202 or info@horizoninvestments.com.

 
Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This report does not attempt to examine all the facts and circumstances that may be relevant to any company, industry or security mentioned herein. We are not soliciting any action based on this document. It is for the general information of clients of Horizon Investments, LLC (“Horizon”). This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this document, clients should consider whether the security in question is suitable for their particular circumstances and, if necessary, seek professional advice. Investors may realize losses on any investments. It is not possible to invest directly in an index.
Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. This commentary is based on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Opinions expressed herein are our opinions as of the date of this document. We do not intend to and will not endeavor to update the information discussed in this document. No part of this document may be (i) copied, photocopied, or duplicated in any form by any means or (ii) redistributed without Horizon’s prior written consent.
Other disclosure information is available at www.horizoninvestments.com.
Horizon Investments and the Horizon H are registered trademarks of Horizon Investments, LLC
©2020 Horizon Investments LLC