It was another strong week for stocks with U.S. equities finishing mostly higher. The S&P 500 gained 76bps, closing at a record high on Friday, while the Nasdaq gained 2.69%, pushing the index to new record levels. The move higher in the S&P 500 capped its fourth straight weekly advance, its longest winning streak this year. The Dow eked out gains of 0.09%, while small caps and the Russell 2K lost ground, finishing lower by 1.59%. Growth and momentum outperformed value and cyclicals in a meaningful way, reversing the prior week’s underperformance. The S&P 500 Pure Growth closed up 0.87% over the five days, while Pure Value ended in the red by nearly ~4.0%. The move higher in equity markets came despite U.S. equity funds experiencing their largest outflows in the last 15 weeks according to Bank of America’s latest flow show report.
Technology names were the biggest standout, closing up 3.54% with help from software and internet names. Apple was the outsized leader gaining more than 8% on the week finishing just shy of $500. Consumer Discretionary was the next best performing sector buoyed by Amazon 4.3%, Tesla +24.2%, and select homebuilders after better-than-anticipated housing data. The Communication Services sector was helped by video game related names, as well as Google +4.7%, Netflix +2.0%, and Facebook +2.2%. Consumer Staples and REITS were the only other two sectors that finished in the green, however lagged broader benchmarks. Energy was the major laggard on the week, falling 5.69%. Financials were the second worst performer with general weakness across the sector, however credit cards, banks, and insurers were among some of the biggest decliners.
Treasuries were firmer as yields fell, with the largest moves seen at the longer end of the curve as the 30- year bond lost ~10bps, while the 10-year note lost just over 8bps. Gold finished the week nearly flat, while Silver closed up 1.30% with the risk-on tone. The VIX ticked up slightly, however continues to trade near its lowest levels since late February as net long positioning remain near the highest levels since early March.
There were no significant changes to the narrative throughout the week as investors pushed the S&P 500 to new all-time intra-day highs of 3,399.96 on Friday. With the fresh highs, the index is now up 52.03% since the March 23rd lows. The main drivers behind the rally continue to be:
- Better Coronavirus trends (although we have been decoupling from headlines for quite some time now)
- Central Bank liquidity
- Vaccine optimism
- Positioning/Sentiment (the Bank of America Global Fund Manager Survey showed investors are the most bullish since February)
However, investors have also seen overhangs develop as the bear narrative has also picked up steam with investors referencing:
- Lack of breadth
- Stretched valuations
- COVID-19 resurgence fears in the fall
- Lack of Developments out of Washington on a stimulus package
- Upcoming Presidential election
- Positioning/Sentiment as a contrarian indicator
Investors digested a busy week of retail earnings coupled with economic data releases. On the earnings front, retail sales releases leaned positive as Walmart saw their E-commerce sales double, while Home Depot, Lowe’s and Target announced their respective comps were stronger than originally anticipated. Many of the companies referenced above noted that although they experienced a robust quarter largely driven by better online sales, they had started to see some moderating of spending trends due to the diminishing of stimulus funds.
There were few developments related to COVID-19 as cases continued their trend lower. Daily new U.S. cases fell below 50K a day for the seventh straight day on Friday, while recent hotspots including California and Florida saw their seven-day averages dip below their two-week running average. Vaccine updates leaned positive this week after Johnson & Johnson said they were moving toward a Phase 3 trial for its COVID-19 vaccine, and Pfizer/BioNTech announced they are on schedule to submit their joint vaccine for regulatory review as early as October.
On the data front, the economic numbers released were received optimistically. Investors seemingly shrugged off a slight uptick in initial jobless claims, which moved higher to 1.1M (which was weaker than estimates of 920K) on the week while continuing claims beat expectations slightly, coming in at 14.84M versus consensus of 14.9M. Housing data remained a bright spot as the housing market continues to be one of the best performing areas of the economy. As mentioned in last week’s insight, August’s homebuilder sentiment matched a record high set back in 1998, with the National Association of Home Builders Index rising six points to 78. Additionally, July’s building permits rose 18.8%, the most in 30 years, while housing starts increased 22.6%, the largest increase since October of 2016. Furthermore, existing home sales jumped a record 24.7%, the most since December of 2006 as record low rates continue to drive demand.
There was no progress on the next Coronavirus relief bill and the only two headlines worth noting were:
- House Speaker Pelosi said a “skinny” deal would not be considered according to Reuters
- Senate Republicans introduced a bill that included $300 in unemployment benefits, another round of PPP funds, $10B for the U.S. Postal Service, and liability protections.
Despite the week’s lack of progress, expectations continue to remain unchanged. However, further negotiations between the two primary parties are not expected to pick back up until after the Labor Day holiday weekend.
While there wasn’t many market-pertinent updates that emerged from the Democratic National Convention, it is worth noting that former VP Joe Biden officially accepted the Democratic nomination. After officially accepting the nomination, Real Clear Politics’ average poll showed President Trump lagging Biden by 7.4 points, which remained little changed from the week prior. The minimal moves seen in the polls show that investors have potentially become more comfortable with Biden’s policies if he were to be elected. While Biden’s overall lead remains largely unchanged, the Democratic candidate still appears to lag behind President Trump in one key area, the economy. According to an August 17th CNN poll, Trump leads Biden by 8 points when respondents were asked about the economy and which candidate “would better handle that issue if they were elected president”.
Outside of the developments mentioned above, it was a fairly quiet week with one of the only other noteworthy headlines being related to the U.S./China trade deal. After postponing their first follow-up call to evaluate the Phase One trade deal, the U.S. and China agreed that they would soon hold discussions to assess the initial deal. While no new date has been set for the meeting, some believe the postponing of the initial call could allow for China to continue to ramp purchases of farm products even further as we have seen in recent weeks. So far, manufactured goods, energy, and agricultural goods are pacing behind the deal’s initial targets which called for an increase of $77B this year over 2017 numbers.
U.S. stocks rose to record highs again after speculation that the Trump administration may fast-track certain vaccines and treatments for COVID-19. Sentiment remained positive as the number of daily new COVID-19 infections which totaled 34,567 on Sunday, was the lowest daily count since mid-June (June 22nd). Equities remained resilient and again brushed off the fact that talks between Democrats and Republicans have yet to yield any further meaningful developments.
Eleven of the 12 sectors finished in positive territory as Healthcare was the lone space that closed lower in Monday’s session. U.S. vaccine developers weighed on the Healthcare sector as competition from the UK and a focus on COVID-19 plasma treatments curbed investor enthusiasm for names currently working on a vaccine. Additionally, the Trump administration is said to be considering fast- tracking AstraZeneca’s COVID-19 vaccine candidate. Novavax and Inovio Pharmaceuticals each fell 15% on Monday, while Sorrento Therapeutics and Moderna fell 19% and 2%, respectively.
The Nasdaq Composite added 0.60% on Monday, lagging its peers, while the S&P 500 gained 1% and the Dow finished 1.35% higher. With the move higher in the Dow, the index is now within 5% of its record highs set back on February 12, 2020. Energy was the best performing sector on the day as crude minimally changed. Two storms in the Gulf of Mexico have caused 82% (17% of America’s oil production) of oil output in the region to shut, according to the Interior Department’s Bureau of Safety and Environmental Enforcement. Financials, Industrials, Materials, Consumer Discretionary and Communication Services all which outperformed broader indices.
As equities continue to trek higher, commentary surrounding market breadth has continued to gain traction. As of Monday, only about 59% of S&P 500 members were trading above their 200-day moving average. While on the surface that may appear to be high, it is in fact unusually low given the S&P 500 is trading at record highs. The lack of breadth continues to illustrate the divergence in those sectors/companies that have been able to take advantage during the pandemic, versus those who have been adversely affected.
The MSCI World Index was up 0.28% last week, led by consumer discretionary, up 2.6%, Information technology, up 2.42%, and communication services, up 1.19%. Energy, finance and utilities lagged the index last week, down 4.43%, 2.31% and 1.79% respectively. The MSCI World value factor was down 1.44% last week, versus 1.82% gain for the MSCI World growth index. The MSCI ACWI low volatility factor was down 1.90% as investors continue to price in a fast economic recovery. The high-dividend yield factor was down 1.06%. Global large cap stocks outperformed small and mid-cap stocks with 0.51% gain versus 0.99% and 0.92% weekly decline.
THIS WEEK INTERNATIONAL
Europe: France announced this weekend that it will delay by a week the launch of its $118B recovery plan. The plan includes tax cuts for local businesses, job promotion for the young population and funding for environmental initiatives. The CAC 40 Index was down 1.34% last week, with auto manufacturers and banks among the worst-performing industries.
The German Bundesbank announced that it sold €2.95B in 12-month bills at an average of 0.57%, below the target of €4B. The Bid-to-cover was 1.4 during this auction. The DAX Index was down 1.06% last week, dragged by weekly losses from financials and discretionary. The Italy/Germany 10-Year Spread widened from 140.85 bps to 145.12 bps last week.
In Spain, the hotel industry expects some consolidation amid drastic decline in occupancy rates due to COVID-19. According to a Deloitte survey, 40% of hotel-sector executives said they thought investors would take advantage of the crisis to buy distressed hotels. The Spanish hotel occupancy rate ticked up to 18.75% in June, versus 12.14% previously. The IBEX 35 Index was down 2.41% last week.
The Euro STOXX Index was down 1.16% last week, led by travel and leisure, real estate and construction. Oil and gas and banks continued to lag the index.
APAC – In China, some investors are now predicting a record default in the bond market by year-end. In fact, $529B of notes mature at the end of the year.
The People’s Bank of China (PBOC) injected $101B to its medium-term lending facility to anticipate and offset these defaults. According to Bloomberg-compiled data, Beijing, Hebei and Fujian have the highest level of local defaults. The Shanghai Composite was up 0.61% last week, led by communication services, up 1.18%. Real estate declined 1.64%.
In Japan, the Central Bank injected 2.4 billion yen via purchase of ETFs and REITs. This is part of the new facility program introduced on June 12th to provide liquidity to the market. In July, Japan ETF net flow increased 70% month-over-month. The NIKKEI 225 was down 1.58% last week.
In Malaysia, the parliament agreed to raise the government debt ceiling by 60%. This comes after the Finance Minister said that Malaysia is prepared to increase stimulus as needed and that the 2020 revenue target is expected to fall short by 15 to 20%. The FTSE Bursa Malaysia KLCI index was up 0.80% last week.
In Singapore, core inflation fell 0.4% in July, posting the lowest reading since 2010. The cost of electricity and gas declined 15.2% year on year. Year-to-date, the Singapore Real Estate Index is down 16.10%. The sector recouped 15% from the March low, while the rest of the market recouped 10%. The STI index was down 2.04% last week.
Jair Bolsonaro, the Brazilian president, signed a decree extending jobs benefits for two months. His liberal approach to government spending is in direct conflict with the Brazilian Finance minister plan to return to austerity next year to reduce national debt. The IBEX Index was up 0.17% 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.