LAST WEEK

The S&P 500 closed the short holiday week just up over 4%. Markets remained resilient even as negative-leaning COVID-19 headlines continued to capture headlines. With the move higher throughout the week, the S&P 500 stood down just 2.13% from where it began the year, while the Nasdaq pushed higher to close at all-time highs. Breadth within the Nasdaq remained particularly strong as the number of members advancing throughout the week remained above the year-to-date average of 47%. On Thursday after 20 years and three months, the Nasdaq 100 Index caught back up to the S&P 500 on a relative performance basis and recouped all of its relative losses associated with the dot.com peak. Many believe that the market may be overvalued at current levels given the recent rally and four straight days of gains last week. However, despite the impressive rally, only 1% of S&P 500 members believe there is still room to run, citing the 14-day Relative Strength Index (RSI) above 70. That compares to the beginning of June when 44% of members had an RSI above 70, the highest level since 1991, seeming to suggest that the markets do not appear to be in “overbought” territory.

Source: Cornerstone Macro as of 07.07.2020

Despite all 11 sectors finishing higher on the week, performance was once again mixed as Communication Services, Real Estate, Materials, Consumer Discretionary, Utilities and Industrials all outperformed. Leadership continues to be non-existent on a week to week basis as we have not seen a true standout performer outside of the Technology and Consumer Discretionary sectors which are currently up 15.68% and 9.54% on the year. Growth once again outpaced Value as S&P 500 Pure Growth finished up 4.13% over the four-day session, while S&P 500 Pure Value closed up +3.00% over the same time frame.

Oil posted its best quarter in 30 years as the commodity rebounded from April’s historic plunge below $0. WTI crude futures nearly doubled in value over the course of the quarter, closing up 91%, the largest rally since 1991. However, even with the historic move higher, the volatile commodity continues to struggle to hold above $40/barrel as demand growth remains subdued in the wake of the ongoing Coronavirus pandemic. Gold continued its march higher, breaking through $1,800/ounce on Tuesday to close at its highest levels since September 2011. Goldman Sachs continues to believe that precious metal could rally to $2,000 over the next 12 months aided by low interest rates and a worsening pandemic.

Investors focus will soon turn towards the 2Q earnings season, as they will look to see if results and corporate commentary help support the current backdrop which shows much of the recovery is already priced into markets. While the recent strength in macro data has surprised many, and the unprecedented stimulus has provided ample liquidity, ultimately companies need to show a follow-through to cash flows and corporate profitability to support current valuations.

Economic data remained surprisingly strong throughout the week as pending home sales in the U.S. jumped the most on record, increasing 44.3% to a three-month high (which fell in April to the lowest level dating back to 2001). ISM Manufacturing numbers once again climbed back into expansion territory for the first time since February, posting its second straight month of advances. Non-Farm Payrolls was the standout datapoint of the week, advancing for a second straight month, as employers added 4.8M jobs in June, beating the median expectation of 3.2M. The V-shaped rebound in payroll data continued to be led by the Leisure and Hospitality sector, one of the hardest hit space throughout the pandemic. The unemployment rate fell to 11.1%, bringing the total number of payrolls to 137.8M according to the Labor Department. Continuing claims remained largely unchanged, for the week with 19.29M people filing for unemployment versus the prior week of 19.23M.

Even as payroll data and continuing claims eased investor fears, the road to recovery still remains a challenging one. This is because of a tougher employment backdrop as U.S. bankruptcies in the 2Q hit 76, with the Energy and Retail sectors most effected. The 76 companies announcing bankruptcy in the second quarter was the most since the 1Q of 2009 when a record 96 filed.

THIS WEEK

U.S. stocks jumped, as Tech shares pushed the Nasdaq Composite to a record high once again. The Nasdaq closed up 2.21% to start the week, followed by the Dow Jones and S&P 500 which finished 1.78% and 1.59% higher, respectively (illustrated in the graph on page 3). The S&P 500 closed higher for the fifth straight session led by Consumer Discretionary, Communication Services, Financials and Technology, all which outperformed broader indexes. Defensive sectors such as Healthcare and Utilities lagged with the Utility sector finishing lower by 1.30%. Consumer Discretionary was buoyed by Amazon, as shares were up 5.77%, surpassing the $3,000 level for the first time, and Tesla extended its five-day rally to almost 40%. Mega cap momentum names were once again the bright spot as Microsoft hit another record high of $210/share, while Netflix and Nvidia neared all-time highs and the SOX index posted another record high. Despite the phrase “all-time highs” appearing in almost every other headline, the S&P remains about 7% from its record highs, while the Dow is about 11% below its respective peak from February.

The Dollar remained under pressure despite the better-than-expected economic data. The Canadian Dollar touched two-week highs while the Euro moved back above the 1.13 level. Yields on the 10-year were up ever so slightly, gaining 2.5bpds to settle at .6772%.

Markets continued their rally, starting the week off in risk-on mode after a front page article in China’s Securities Times said that fostering a “healthy bull market” after the pandemic was now more important to the economy than ever before. U.S. markets followed its Asian counterparts higher as the Shanghai Composite posted its largest daily advance of 5.71% since 2015. With the move higher on Monday, the MSCI world Index is now at its highest level since early June.

The ISM Non-manufacturing index jumped to a four-month high in June and moved back into expansion territory. The non- manufacturing index soared a record 11.7 points to 57.1 exceeding the 50.2 expectation. Looking ahead it will likely be a fairly quiet week on the data front with the only key events potentially impacting the markets throughout the week being:

The EIA crude oil inventory report comes Wednesday
U.S. weekly jobless claims report on Thursday

Painting a less than rosy picture was JPMorgan. Just two weeks after JPMorgan said it was turning bullish on the U.S. by officially upgrading U.S. equities to Overweight after missing the biggest equity rally in decades with a Neutral rating on U.S. stocks, the bank’s chief equity strategist said that looking ahead, much of his newly found optimism has vaporized and as a result, “risk reward is unattractive for equities in 2H of 2020” and stocks are likely to lag bonds and cash again, as they did in 1H 2020.

THIS WEEK INTERNATIONAL

Europe – The Eurozone manufacturing PMI rose to 47.4 in June, versus 39.4 previously. Services PMI jumped to 48.3 versus 30.5 in May. Germany manufacturing PMI rose to 45.2, while France posted a solid 52.3.

According to Bloomberg Economics, European consumers now have more savings than they had before the crisis. In the UK, household saving ratio is estimated to have reached 21% of disposable income in the second quarter. In Germany, France and Spain, the excess liquidity was used partly to repay loans.

The European Central Bank (ECB) encouraged European banks to merge in a draft guide published on July 1st. From a rating perspective, S&P Global stated that consolidation is “ratings-neutral” due to execution risk and the financial health of the acquisition targets.

The Euro STOXX Index gained 3.37% last week, led by Banks, Chemicals, and Utilities.

APAC – The Caixin China manufacturing PMI slightly increased to 51.2 in June, versus 50.7 previously. Caixin Global reports that “supply was generally stronger than demand in the manufacturing sector, as production continued its expansion amid broader economic rebound while demand had yet to recover.” The Shanghai Composite index climbed 3.73% last week, led by Real Estate, up 7.67%.

The Hang Seng index has risen 21% from its March low and officially entered bull market territory. Hong Kong stocks were up 2.34% last week, led by Communications, Industrials, and Real Estate. The government forecasts 4% to 7% economic contraction in 2020.

In Japan, Bank of Japan (BOJ) injected ¥2.7B in the economy via purchase of J-REITs and ETFs. The Japanese Central Bank started J-REITs and ETFs asset purchases in December 2010.

In a letter to regional banks, the Japanese Ministry of Internal Affairs urged small banks to fully utilize the BOJ lending program.

According to him, “only a portion of the potential outstanding amount is being used”. The Nikki 225 was down 1.63% last week.

In South Korea, consumer prices remained flat in June compared to a year earlier despite stimulus payments sent to households to support consumption. Manufacturing PMI rose to 43.4 in June, versus 41.3 previously. The KOSPI index was up 0.03% last week, led by communications.

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