Commentary provided by John Packs, Senior Investment Officer, AIG Retirement Services
Weekly Market Performance Snapshot (Week ending August 14, 2020 & Year-to-Date)
- Dow Jones Industrial Average®: +1.8% / -1.9%
- S&P 500® Index: +0.6% / +4.4%
- NASDAQ Composite® Index: +0.1% / +22.8%
- Russell 2000® Index: +0.5% / -5.5%
- 10-year U.S. Treasury note yield: 0.713%, up 15.2 basis points from 0.561% on August 7 and down 121 basis points from 1.92% on December 31
- Best-performing S&P 500 sector this week: Industrials, +3.1%
- Weakest-performing S&P 500 sector this week: Utilities: -2.1%
Positive Economic Data Boosts Markets, but Uncertainty Over Fiscal Stimulus Remains
Three significant data points this week pointed toward continued improvement in the U.S. economy. However, the strength and endurance of the recovery still depends in large part on fiscal stimulus. The White House and Congress appeared no closer to a deal, but markets seem to be expecting one at some point.
- Weekly jobless claims came in below 1 million for the first time since mid-March, registering 963,000. This suggests that the labor market continues to improve incrementally, as virus case counts begin to moderate after a mid-summer spike.
- The Consumer Price Index showed a larger-than-expected uptick of 0.6% for July, following a similar gain in June. Rising prices generally signal increased economic activity.
- Retail sales rose 1.2% in July, adding to gains from the previous two months. Retail sales are now higher than they were prior to the start of the economic contraction. The durability of the retail recovery may depend in part on fiscal policy.
- After flirting with the 50 basis point level for the past several weeks, the yield on the 10-year U.S. Treasury note surpassed 70 basis points this week, amid signs of inflation and economic recovery. The yield reached 90 basis points in June—a mark that doesn’t look out of reach if economic conditions continue to improve.
- While the macroeconomic trends are headed in the right direction, the wild card is how soon Democrats and Republicans can agree on another round of fiscal stimulus. President Trump took actions through executive orders to extend enhanced unemployment benefits, among other measures. However, markets are expecting a legislative solution that includes more substantial help for consumers, businesses, and government.
- Federal Reserve officials continue to reiterate the need for additional fiscal stimulus. San Francisco Fed president Mary Daly said that, given the ongoing challenge of the coronavirus, “The length of the support that the economy is going to need—before we can ever stimulate the economy—it just has to be longer.”
S&P 500 Approaches Record Amid Cyclical Rotation
The S&P 500 Index closed just 0.4% from the record closing high it reached in February. While big technology stocks drove some of the gains, investors also made a cyclical move toward industrials, financials, and other sectors that typically perform well in good economic times.
- Over the past month, the industrial sector—which includes companies such as Caterpillar, Stanley Black & Decker, and UPS—has had the strongest market performance. This suggests some level of optimism about the future direction of the economy, as the sector’s composition reflects the broader economy.
- News that Russia approved a COVID-19 vaccine without phase III human trials was greeted with a mix of skepticism and optimism. Separately, the U.S. government announced that it will buy 100 million doses of a potential vaccine from Moderna.
- Following the news of a possible vaccine, Treasury yields rose, gold sold off, and cyclical stocks rallied. It’s unclear whether these market moves were transient or the beginning of a lasting trend. However, they may signal how markets will respond when a vaccine is approved by the U.S. and European governments.
- A big question facing markets is where future growth will come from. Will mega-cap technology stocks continue to rise as economic activity remains largely online, or will a broader-based economic recovery take hold once a vaccine and treatments become widely available? Amid uncertainty, investors should consult with a financial professional about how to be positioned for a range of economic trajectories.
The U.S. and China Continue Tit for Tat
The U.S. and China are meeting to discuss progress on the phase one trade deal. The pandemic appears to have slowed Chinese purchases of U.S. products through the first half of the year. However, ongoing tensions around Hong Kong and the U.S. executive orders targeting WeChat and TikTok could be a more contentious discussion point.
- China announced sanctions on 11 U.S. officials, including multiple U.S. senators, in response to U.S. sanctions of Chinese officials in the wake of the new national security law in Hong Kong.
- In a further response to the Hong Kong national security law, the U.S. plans to require goods exported from Hong Kong to bear a “Made in China” label.
- Markets will continue to look for signs of how the ongoing tension between the world’s two largest economies could affect economic growth as the world works to recover from the coronavirus.
Past performance is not a guarantee of future results.