Summit Snapshot: Week of May 26th, 2020
- Global Markets: Renewed optimism pushes equities to pandemic-era highs
o U.S. Equities provided strong returns throughout the week as the S&P 500 Index advanced by 3.3% and touched its highest level on Wednesday since early March. Two main catalysts contributed to the strong week – the hopeful news of a step closer towards an official vaccine and some powerful statements from the Federal Reserve promising to support the economy in whatever fashion is necessary. Pharmaceutical giants Moderna Therapeutics and AstraZeneca had reported some preliminary optimistic news. Moderna (MRNA) announced its vaccine candidate showed some early signs in which antibodies were developed in humans. AstraZeneca (AZN) is now involved in a rapid vaccine-production project that is funded with $1.2 billion provided by the U.S. Department of Health and Human Services. The other catalyst for last week’s market returns started on the May 17th episode of 60 Minutes when Federal Reserve Chairman Jerome Powell said, “there is really no limit to what we can do (to support the economy).” This strong statement was widely circulated throughout the news and follows his prior week’s warning of lasting economic damage. Most sectors in the S&P 500 had sizable positive returns led by industrials (+7.3%) and energy (+6.8%). The only lagging sector was health care (-0.7%), a reversal of trends as of late. Elsewhere small-cap stocks beat their large-cap peers, and value outpaced growth as measured by their respective Russell indices. Interestingly the steep decline of the Russell 2000 Value Index from last week reversed, and the index rose by 9.1%.
o International Equities mostly rose, as some regions were more pronounced than others. The rise of European equity markets was similarly spurred by hopes of an economic recovery and ending the localized lockdowns. France and Germany proposed a €500 billion recovery fund restricting investor access to the funds over the next seven years, unlike other more common recovery-driven loans or grants. Developed markets beat emerging markets as shown by the MSCI EAFE Index rise of 3.0% compared to the MSCI EM Index rise of only 0.5%. Japanese stocks benefitted after the Bank of Japan held an impromptu monetary policy meeting to discuss possible additional funding for small and medium-sized companies facing insolvency concerns. Chinese equities rose through Thursday but plummeted on Friday to end the week down by 2.6%, uncorrelated to most other countries. This decline is related to the existing controversial trade-war issues China is facing with the U.S. as well as the announcement of an enhanced national legislation on Hong Kong, which the U.S. government strongly disapproves of.
o Credit Markets provided small, modest gains supported by positive net flows and increased levels of demand. The 10-year yield spiked briefly on Monday as investors digested upbeat vaccine-related reports but slowly trickled down to end the week at 0.66%, roughly unchanged from the week prior. In fixed income sectors, municipals rose and outperformed Treasuries while investment-grade and high-yield corporate bonds also gained ground as demand from overseas investors and category inflows increased. Reflective of these actions, the Bloomberg Barclays U.S. Aggregate Bond Index increased by 0.4% for the week.
- Economic Data/News: Central bank’s presence and policies influenced investors despite additional job losses (possibly temporary) and rising U.S.-China political tensions
o U.S.: Varied beliefs that further monetary and fiscal policies may support an additional stimulus took a foothold after Jerome Powell’s statements implied the U.S. can provide powerful economic support. Following this was Thursday’s testimony in which Treasury Secretary Steven Mnuchin said the White House will wait and see how the existing stimuli affect the economy before taking the next step(s). Also, on Thursday it was reported an additional 2.4 million Americans filed initial jobless claims, indicating the pandemic’s effects on the labor market have not dissipated yet. Some encouraging data included IHS Markit’s services sector report which rose unpredictably and better-than-expected existing home sales in April. The news wasn’t all rosy though because of the ongoing U.S.-China feud. On Wednesday, the U.S. Senate passed a bill which could result in some Chinese companies being prevented from listing their shares on U.S. stock exchanges.
o International: Eurozone business activity showed a promising sign as the IHS Markit’s Service and Manufacturing Sector Composite Index rose from 13.6 in April to 30.5 in May. This is still well below the median level of 50, distinguishing growth from contraction, but did climb handsomely. Eleven European countries agreed on prespecified rules to allow cross-border travel and tourism when appropriate. In Japan, economists predicted contraction levels throughout their broad economy near 20% following a series of negative business-related reports. China’s congress met on Friday and officially announced there is no specified growth target in use for the first time since 1994, giving policymakers an increased level of flexibility to act accordingly during the nation’s economic reopening process. Instead the nation’s focus shifted towards employment stabilization efforts.
- Odds and Ends: New travel restrictions added amidst an unparalleled death toll, some hints that the shutdown effect may have bottomed, and the NYSE floor scheduled to reopen with precautions
o As one of the more unique Memorial Day weekends has arrived, the U.S. said it is imposing new travel restrictions on Brazil as their coronavirus cases continue to rise. This ban will take effect on May 28th and is like previous bans implemented with parts of Europe and Asia. These continued drastic preventative measures will be put in place after the U.S. death toll caused by the coronavirus neared 100,000. Since many types of vacations have been canceled or at least delayed, alternate plans for some include domestic travel to campgrounds or rental homes after an intense round of sanitation of all tangible surfaces. The summer of 2020 promises to be quite different than ever in modern history.
o Business segments in various industries are very slowly starting to rebound from the worst of the shutdown effects felt since mid-March. Some indications include new bookings being made for air travel and hotels, an increase in passenger screening counts through TSA checkpoints, an increase in mortgage applications, and new business applications. It is nearly certain that the U.S. GDP will contract this year, to the tune of roughly 6%, and unemployment will remain elevated. Still recent data indicates the country is emerging from its shutdown cocoon. Of course, this assumes there will not be a second wave of the virus or perhaps its effects will be muted.
o The New York Stock Exchange (NYSE) is scheduled to reopen its famous trading floor on the Tuesday after Memorial Day, mandating its employees to adjust to the “new normal”. Initially, only one-quarter of all employees will return after signing a waiver and must follow other new guidelines. These rules require employees to wear masks, abide by all new plexiglass barriers installed to maintain social distancing, and are forbidden to ride public transportation. In addition, media broadcasts will not be happening from the floor for the time being.
- Resource of the week: If you have ever had to decipher a squiggly word and type it into a website as part of the sign-in process, chances are you’ve used the brilliant invention created by Luis von Ahn. This episode of How I Built This with Guy Raz features a conversation with Luis, the founder of reCAPTCHA, a software that enforces human interaction and verification methods instead of a computer, and of Duolingo, a popular language-learning system. He is a curious person driven to learn each day and has had a profound impact on many people in different ways. Please feel free to submit suggested resources to firstname.lastname@example.org.
Sources: The WSJ, T. Rowe Price Global Markets Weekly Update
This commentary was written by Craig Amico, CFA®, CIPM®, Senior Investment Analyst, Noreen Brown, CFA®, Director of Portfolio Management and Steven Melnick, CFA®, Senior Investment Analyst at Summit Financial, LLC., an SEC Registered Investment Adviser (“Summit”), headquartered at 4 Campus Drive, Parsippany, NJ 07054, Tel. 973-285-3600. It is provided for your information and guidance and is not intended as speciﬁc advice and does not constitute an offer to sell securities. Summit is an investment adviser and offers asset management and ﬁnancial planning services. Indices are unmanaged and cannot be invested into directly. The Wilshire 5000 Total Market Index measures the performance of all U.S.-headquartered equity securities with readily available price data. The Standard & Poor’s 500 Index (S&P 500) is an unmanaged group of securities considered to be representative of the stock market. The Russell 2000 Index is a market-cap weighted index comprised of the smallest 2,000 companies within the Russell 3000 Index, a larger market-cap index made up of the largest 3,000 publicly traded companies in the U.S., nearly 98% of the investable U.S. stock market. The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI Europe Index captures large- and mid-cap representation across 15 Developed Markets countries in Europe, covering approximately 85% of the free float-adjusted market capitalization across the European Developed Markets equity universe. The MSCI Emerging Markets (EM) Index captures large- and mid-cap representation across 26 Emerging Markets countries, covering approximately 85% of the free float-adjusted market capitalization in each country. The MSCI Japan Index captures large- and mid-cap representation of the Japanese market, covering approximately 85% of the free float-adjusted market capitalization in Japan. The Bloomberg Barclays U.S. Aggregate Bond Index is a market capitalization-weighted index comprising Treasury securities, Government agency bonds, mortgage backed bonds, corporate bonds, and some foreign bonds traded in the U.S. The Bloomberg Barclays Global Aggregate Ex U.S. Index measures the performance of global investment grade fixed-rate debt markets that excludes USD-denominated securities. The Bloomberg Barclays Municipal Bond Index covers the U.S. dollar-denominated long-term tax-exempt bond market. Created by the Chicago Board Options Exchange (CBOE), the Volatility Index, or VIX, is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility. Data in this newsletter is obtained from sources which we, and our suppliers believe to be reliable, but we do not warrant or guarantee the timelines or accuracy of this information. Consult your financial professional before making any investment decision. Past performance is no guarantee of future results. Diversification/asset allocation does not ensure a profit or guarantee against a loss.