Economic and political backdrop
Last week’s corporate earnings reports demonstrated that some major companies are benefiting from the pandemic’s impact on consumer patterns. This was on clear display Thursday evening, when Facebook, Amazon.com, Apple and Alphabet (parent company of Google) – which together account for almost one-sixth of the market capitalisation of the S&P 500 – reported mostly healthy gains in revenues despite the pandemic. On Wednesday, the CEOs of all four companies testified in defence of their growing market power in front of a congressional antitrust subcommittee. Investors seemed generally relieved with the tone of the questioning, with the shares in all four holding steady or rising slightly in its aftermath.
Investors also kept a close eye on negotiations in Congress over a new stimulus package. Futures were higher before trading started Monday in expectation of the release of a plan from Senate Republicans, rumoured to include new direct payments to lower-income Americans, as well as a revised supplemental unemployment package designed to replace 70% of an individual’s lost wages. However, sentiment wavered later in the week as negotiations appeared to stall, even as current supplemental unemployment benefits of USD 600 per week were set to expire Friday. Political matters also took an unexpected turn Thursday morning, when President Trump tweeted out the suggestion that the November elections might be delayed because of the alleged possibility of voting irregularities – an idea quickly rejected by Republican congressional leaders.
The week’s economic data seemed to generally weigh on sentiment. The biggest headline was the initial estimate of second-quarter GDP, showing the economy contracting at an annualised rate of 32.9%, slightly less than consensus forecasts but by far the largest retrenchment in modern history. The number of Americans seeking unemployment benefits for the first time ticked up for the second straight week – to 1.43 million – and continuing claims rose for the first time in two months. The housing market was a bright spot, with pending home sales rising in June for the first time in four months. The manufacturing sector also seemed to remain on the road to recovery, with durable goods orders expanding by 7.3% in the month, slightly above expectations.
The S&P 500 recorded a gain of 1.8% (2.7% YTD), as investors reacted to a flood of quarterly earnings reports and some prominent economic data. Large-caps and growth stocks outperformed, putting at least a temporary end to the rotation into small-caps and value shares over the previous two weeks – Russell 1000 Growth returned 3.8% (18.5% YTD), Russell 1000 Value -0.2% (-12.6% YTD) and Russell 2000 0.9% (-10.3% YTD).
Within the S&P 500, real estate investment trusts fared best as longer-term bond yields fell, making their dividends more attractive in comparison. The much larger technology sector was also strong. Energy stocks recorded the largest declines. The price of a barrel of Brent was stable last week, ending the week at USD 43.3. Materials shares were also weak.
Corporate earnings were in the spotlight during the week, with 189 of the S&P 500 companies slated to post second-quarter results, according to Refinitiv. The imprint of the pandemic was clearly visible, with diversified industrial and materials companies reporting sharp declines in revenues. Analysts polled by FactSet are predicting overall earnings for the S&P 500 to have declined by roughly 36% versus the year before, the biggest drop since the end of 2008. FactSet reports that more companies than usual have been beating estimates, however.
Fixed income markets
The economic data, election worries, and the uncertain fiscal backdrop pushed the 10-year Treasury yield to its lowest level of 0.53% since early March. At its midweek meeting, the Federal Open Market Committee left the federal funds rate at its target range of 0.00% to 0.25%, as expected, and extended its emergency lending facilities through the end of the year.
Overall volumes in the investment-grade corporate bond market were light as month-end buying drove most of the trading, but primary market activity picked up following two weeks of modest issuance. Credit spreads drifted marginally wider across most segments.
The high yield market was mostly focused on earnings releases, and there were few negative headlines. ETFs were active buyers, although modest new issuance made putting money to work a challenge. According to J.P. Morgan, the number of high yield issuers suffering downgrades has declined markedly over the past three months after spiking in March and April. The energy industry has experienced the most downgrades in 2020.
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