U.S. equities advanced on the week while posting solid gains as the Nasdaq led the way closing higher by 3.74%, followed by the S&P 500 and Dow Jones, which ended up 1.86% & 1.07%, respectively. The S&P was led by Healthcare, Technology, Consumer Staples, Consumer Discretionary, Materials and Communication Services, all which outperformed. Utilities, Energy, REITS, Financials and Industrials all underperformed the broader market. Technology was a standout over the week led by Semiconductors, as well as more growth-oriented software names. Large tech stocks also put in an impressive performance with the Merrill Lynch Fang Index closing up 4.85% on the week, with three of the four names closing 3% higher (Google lagged closing up 1.3%). Consumer Discretionary was buoyed by Amazon (+5.1%), while restaurants, casinos, travel/leisure, cruise liners, and other names pinned to the ongoing reopening, came under pressure amid negative leaning headlines related to COVID-19. Healthcare saw broad based gains, however Large Pharma name Eli Lilly led the space after announcing positive data for their breast cancer treatment. Industrials underperformed the S&P 500, receiving no help from airline related names after concerns regarding a second wave of the Coronavirus emerged. However, building materials and building related names helped offset any weakness, allowing the Industrial sector to close up .57%. Energy was one of the few sectors closing lower on the week despite WTI crude rallying nearly 10%.
Growth and momentum factors outperformed the value trade again last week. Volumes last week were higher with the S&P re-balance and quadruple witching (Stock index options, Single name options, Single name futures, and Stock index futures all expiring) taking place on Friday. One of our trading partners noted they were net sellers each day, Monday through Friday. However, Friday’s flows saw a large move of funds into healthcare-related names, and in particular, biotech.
Markets remained resilient and were able to overcome negative COVID-19 and election-related headlines throughout the week, which included:
- An outbreak in Beijing’s largest fruit and vegetable supply center
- Rising infection rates & hospitalizations in multiple states such as Florida, Arizona and Texas
- Release of former National Security Advisor John Bolton’s tell all book regarding President Trump
- A Fox News poll release showing Trump 12 points behind Biden, the widest margin this year
- Apple announcing the re-closing of certain stores in areas seeing a spike in cases
- Cruise liners announcing the suspending of all trips out of U.S. ports until at least September 15th
Markets instead focused on the positive factors that emerged, including:
- The Fed announcement that the Central Bank (CB) would start buying individual corporate bonds
- Ongoing speculation regarding an infrastructure stimulus bill that could top $1T (despite continuous push-back from Senate Republicans)
- The continued V-shape recovery
- Additional positive economic data releases
- Continued re-opening narrative despite the barrage of negative media headlines
- New potential treatments related to COVID-19 such as Dexamethasone, an easily available generic steroid, which has reduced deaths by 35% in severe Coronavirus patients according to the RECOVERY study funded by UK Research and Innovation and the National Institute for Health Research.
On the Coronavirus front, many of the headlines continue to lean negative. As briefly mentioned above, Beijing experienced an outbreak at a vegetable market. However, city officials quickly ramped up containment efforts and said that the outbreak had been contained. Domestically, much of the focus continued to surround an uptick in infections and hospitalizations in Southern and Western states. On Thursday, CNBC reported that California, Arizona, Texas, Florida and South Carolina had all reported record-high single day increases in Coronavirus cases. While the nation’s seven day average in new cases increased more than 15% versus a week ago, it appears to be driven largely by states who have not experienced a significant first wave in comparison to other “hotspots.” When looking at previous “hotspots” we continue to see better trends emerging in cities such as:
- New Jersey • New York • Washington D.C. • Connecticut
As mentioned, last week the Fed announced they would begin buying individual corporate bonds through one of their corporate credit facilities, rather than just ETFs’, which they have done until recently. While the announcement was not new, it simply confirmed to investors that the Central Bank was willing to move forward with previously announced plans and provide an accommodative monetary backdrop in order to provide liquidity and a backstop to markets.
Gaining more attention throughout the week was the amount of corporate bond issuance. This year, blue-chip U.S. companies have borrowed an astounding $1.12T already, exceeding the amount of cash raise in all of 2019 according to Bloomberg. The issuance of new debt at a record pace is not expected to slow down as companies look to shore up liquidity and take advantage of historically low interest rates amid the global pandemic. On a flow basis, investors have seen 11 straight weeks of inflows into Investment Grade bond funds and 12 straight weeks of inflows into High Yield bond funds. Despite the Fed’s balance sheet contracting for the first time since February, it was more related to a decline in FX swap’s with foreign Central Banks (other CB’s looking for USD), showing that global funding markets remain relatively calm.
V-shaped recovery expectations gained additional traction throughout the week amid ongoing better-than-expected data releases in the U.S. The Citi U.S. Economic Surprise index, which measures data surprises relative to market expectations, hit an all- time high on Friday. The biggest shock to investors came from the extremely firm retail sales number in May which increased 17.7%, while estimates called for an 8.1% increase. The advance was the largest sequential gain on record after experiencing a 14.7% contraction the month prior. Additionally, weekly jobless claims showed a gradual improvement again, falling to 1.51M which was the 13th straight week the number remained above 1M. Continuing claims decreased as well, although was not as large of an improvement as anticipated. The National Association of Home Builders housing index showed that sentiment improved more than expected, jumping to 58. The 21-point gain from the previous month was above the average analyst estimate of 46 and came as record low interest rates spur buyer demand.
The idea of contrarian positioning garnered some attention throughout the week as both the Wall Street Journal and Bloomberg highlighted large cash stockpiles in two separate articles. Many investors appear to be remaining cautious at current levels after the markets ~40% rebound. According to Bank of America’s June Global Fund Manager Survey, the results showed that the greatest number of respondents since 1998 believe that the stock market is “overvalued.” Additionally, a quick look at the American Association of Individual Investor’s Bullish reading reflects that retail investors are at their most bearish levels in more than a month.
U.S. equities closed up to start the week led by strong
gains in Technology. The Nasdaq outpaced other indices finishing up 1.11%,
closing at a record high and advancing for seven straight sessions, as well as
18 out of the last 21 sessions. Multiple large cap tech names hit new highs
including Microsoft, Adobe, Nvidia, Apple, Electronic Arts, Activision
Blizzard, and Netflix. Despite the Healthcare space being the second weakest
sector on the day behind Financials, biotech managed to buck the broader selling
pressures within the group as the IBB (Biotech ETF) touched new 52-week highs
intraday. Stocks pegged to the re-opening of the economy once again
underperformed and were among the top decliners, while stay at home related
names held up better. As we near the end of the second quarter, the Dow is
currently on track for its largest quarterly gain since the 1Q of 1987, while
the S&P is posting its best returns since the 4Q of 1998.
The market continued to push to the upside in a quiet, but choppy session, bouncing between gains and losses in the early morning session before finding its footing and turning higher shortly after 11am ET. The move to the upside on Monday came as the country continues to see two different storylines related to COVID-19. In New York City, Mayor Bill de Blasio announced that Phase II is officially underway within the city as in-store retail, offices, hair salons, and outdoor dining are allowed to open for business. On the other end of the spectrum, Texas Governor Greg Abbot said the virus is spreading at an “unacceptable rate” and that he may halt or reverse the state’s economic reopening as positive tests have almost doubled to 9%. The state’s hospitalizations rose by 302 in the past 24 hours, the most in two and a half weeks, bringing the total number of hospitalizations to 3,711 in the Lone Star state. The comments from Governor Abbot come after the U.S. recorded its highest case count in two months (30K) on Friday however, the slowing death rate has eased some investor fears allowing for the continued move to the upside.
Comments from famed investors Steve Schwarzman and Bill
Ackman appeared to paint a fairly optimistic picture moving forward. During the
Bloomberg Invest Global 2020 virtual conference, Steve Schwarzman, CEO of
Blackstone Group said “you’ll see a big V in terms of the economy going up for
the next few months because it’s been closed,” however believed it will “take
quite a while before we sync up and get back to 2019 levels.” Bill Ackman of
Pershing Square echoed similar comments saying he believes the recovery will be
underway by year end, and that a normalization of the economy will start to
occur during the second half of 2021.
THIS WEEK INTERNATIONAL
Europe – European politicians, Christine Lagarde and Angela Merkel, urged European leaders on Friday by video conference to agree on the proposed $840B stimulus package to avoid a market shock. France and Germany are pushing to get it approved by the end of July. However, Denmark wants to reduce the size of the recovery fund and target it to countries that have been the most impacted by the pandemic. Austria wants the funds to be tied to broader reforms that will make the European Union (EU) more competitive in the global stage. Charles Michel, president of the EU Council, proposed a physical meeting around mid-July to negotiate the agreement. The Euro STOXX Index was up 3.12% last week, led by Technology and Healthcare.
Italy is exploring value-added tax reductions in areas that have suffered the most from the COVID-19 crisis. The country is under scrutiny as European counterparts monitor structural reforms and a clear plan for the use of funds allocated by the recovery fund proposal. Italian stocks rose 3.87% last week.
In the United Kingdom, Bank of England (BOE) is already planning balance sheet normalization after it reached a record $864B recently. BOE Governor Andrew Bailey warned that “elevated balance sheets could limit the room for maneuver in future emergencies. When the time comes to withdraw monetary stimulus, it may be better to consider adjusting the level of reserves first without waiting to raise interest rates on a sustained basis.” The FTSE All-Share Index gained 3.16% last week.
APAC – China confirmed that its national security law proposal will override the Hong Kong legal system. Hong Kong Chief Executive Carrie Lam said that her government will fully support the bill. China will establish a national security bureau in Hong Kong to review an extremely small number of cases under specific circumstances. The Shanghai Composite Index rose 1.64% last week led by Communications and Industrials, while the Hang Seng Index gained 1.41%.
Bank of Japan (BOJ) Governor Haruhiko Kuroda announced that he anticipates interest rates remaining low until 2023. Consumer prices excluding fresh food fell 0.2% year on year, sparking deflation fears. BOJ hinted that inflation management is not currently a priority. The NIKKEI 225 was up 0.78% last week.
In South Korea, exports of semiconductors increased 2.6% year-on-year in the first 20 days of June, versus 7.1% growth for the full month of May. According to the South Korea Ministry of Trade, Industry and Energy, exports to China grew 14.5% during the same period, while exports to the U.S. and Japan declined 16% and 10% respectively. The KOSPI Index rose 0.42% last week.
The information provided, including any tools, services, strategies, methodologies and opinions, is expressed as of the date hereof and is subject to change. Level Four Capital Management (“LFCM”) assumes no obligation to update or otherwise revise these materials. The information presented in this document has been obtained from or based upon sources believed by the trader or sales personnel or product specialist to be reliable, but LFCM does not represent or warrant its accuracy or completeness and is not responsible for losses or damages arising out of errors, omissions or changes or from the use of information presented in this document. This material does not purport to contain all of the information that an interested party may desire and, in fact, provides only a limited view. Any headings are for convenience of reference only and shall not be deemed to modify or influence the interpretation of the information contained.
This material has been prepared by personnel of LFCM and is not investment research or a research recommendation, as it does not constitute substantive research or analysis. This document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject LFCM to any registration or licensing requirement within such jurisdiction. It is provided for informational purposes, is intended for your use only, and does not constitute an invitation or offer to subscribe for or purchase any of the products or services mentioned, and must not be forwarded or shared with retail customers or the public. The information provided is not intended to provide a sufficient basis on which to make an investment decision. It is intended only to provide observations and views of certain LFCM personnel. Observations and views expressed herein may be changed by the personnel at any time without notice.
Nothing in this document constitutes investment, legal, accounting or tax advice or a representation that any investment strategy or service is suitable or appropriate to your individual circumstances. This document is not to be relied upon in substitution for the exercise of independent judgment. This document is not to be reproduced, in whole or part, without the written consent of LFCM.