Summary
The financial markets showed little conviction last week, not atypical for mid-August (even with the pandemic raging). This is attributable to a combination of people being off work or away for holiday, and a dearth of market-moving news.
Nonetheless, the S&P 500 finally managed to breach its mid-February high for the year on Tuesday, giving the gains up mid-week but then surging to close at an all-time record high on Friday. Equity markets outside of the U.S. fared less well.
Safe haven assets drifted in a narrow range last week without much conviction. The same was true for corporate credit, although investment grade issuers continue to take advantage of record-low yields by issuing new bonds.
475 of the S&P 500 companies have now reported earnings, and more than usual have exceeded analysts’ consensus expectations. 2Q20 earnings and revenue growth have gradually been revised upwards (meaning less negative) as a result. The P/E of the S&P 500 using four quarters expected future earnings (3Q20 – 2Q 21) is 23.2x.
The focus of CV19 has returned to Europe, where it seems that coastal holiday seekers, especially in France and Spain, have caused cases to rachet back up. As a result, the U.K. is being particularly proactive in forcing 14-day quarantines on returning travellers, leading for the second week in a row to travel chaos at the end of the week.
Global Equity Markets
The U.S. equity markets were once again the star performer last week. After a few failed attempts, the S&P 500 finally managed to close on Tuesday above its 2020 high that was reached on February 19th (3,386.15), even if just barely. The index surrendered the gains the following two days, but roared into the close on Friday, finishing at 3,397.16, +0.7% on the week and at a new record for the S&P 500 index. It took only six months for the S&P 500 to claw back its pandemic-inspired losses, an amazing recovery in a short period of time, especially given the rather dire environment we continue to face globally. With this behind us, we might very well see the U.S. equity markets take another leap forward as momentum takes over n the context of a low volume, late-August backdrop. Volumes on the S&P 500 last week averaged 3.76 bln shares/day, compared to August to date of 4.1 bln shares/day, and for the year (2020) of 5.2 bln shares/day.
The chart below from Yahoo Finance shows the trajectory of the S&P 500 over the last 10 years (monthly data), from August 21, 2010 to August 21, 2020. This includes the tail end of the Great Recession, and the index’s performance under the Administration of former President Obama and the current President Trump. It has been a very good ride for the U.S. equity markets!
As far as other markets around the world, last week was not particularly good, as you can see in the table below.
I commented last week that perhaps it’s time to consider rotating out of the U.S. equity markets into other global markets where there might be more value and upside. Perhaps my timing was poor, as all of the other markets I track declined last week. There is increasing talk of the (continental) European markets having peaked now after a good run over several weeks, so the U.K. market (FTSE) might be where the real value is. I’m not buying it mainly because the economy in the U.K. remains in tatters (albeit trending in the right direction), and it’s now late August with no post-BREXIT deals in sight involving the E.U., the U.S., or other trading partners. It may happen, but Boris Johnson and his team are running out of time.
Let me close this section by taking a quick look at the Chinese equity markets via the Shanghai Index. The Shanghai Index is up 10.8% YtD, outperforming the S&P 500. However, the Shanghai Index reached its high on July 9th (3,450.59) and has trended slightly down since then, closing last week at 3,380.68. Although Shanghai has outperformed the S&P 500 YtD, its performance has diverged from that of its U.S. counterpart since early July, as trade (and political) rhetoric has increased.
Credit Markets
Investment grade U.S. corporates continue to take advantage of record-low yields. The chart below from Bloomberg illustrates corporate investment grade new issue volumes YtD, which have already reached or surpassed full year volumes in every year since 2016.
The secondary market was uninspiring last week, with corporate spreads across the credit spectrum (investment grade and high yield) in the U.S. and Europe drifting a few basis points wider on the week.
Safe Haven Assets & Oil
As far as haven assets, both gold and the Yen were slightly weaker last week. The USD was slightly better, bouncing off mid intra-week lows. The 10-year UST was 7bps tighter on the week, closing Friday at +0.64%, and the 2-10 year yield curve flattened (9bps). WTI oil was modestly better on the week, closing at $42.25/bbl on Friday (+0.6% W-o-W). Looking at this in aggregate, it feels more or less uneventful, like one would expect a mid-August week to feel. There were no convincing directional signals coming from this largely sideways movement in safe haven assets and WTI oil.
S&P 500 Earnings
Since 2Q earnings releases have decreased, I did not cover this topic last week. But as we near the end of this round of earnings, I wanted to share some data from #Refinitiv to help you think about the 2Q and what may lie ahead. 475 of the S&P 500 companies have now reported earnings, and 82% have exceeded analysts’ consensus expectations. 2Q earnings have been gradually revised upwards as earnings have come in, currently standing at -30.5% vs 2Q2019, and revenues similarly have been revised to -8.9% vs 2Q2019. (Both include the beleaguered energy sector.) The current estimates for 3Q2020 (vs 3Q2019) are for earnings and revenues to be down 22.5% and down 5.0%, respectively, both trending – as would be expected – in the right direction. The P/E ratio is 26.1 for CY2020 versus 20.8 for CY2019. Looking forward four quarters, the P/E ratio of the S&P 500 is 23.2x using forward expected earnings for the period 3Q20 to 2Q21.
The theme of the remaining smattering of S&P 500 companies this week is a slight bias towards retailers, including the likes of Best Buy, Tiffany, Dollar Tree, Dollar General and GAP. These will provide some indications of U.S. consumer spending, largely the driver of the U.S. economy.
Should you be interested in digging deeper, the Refinitiv report for the week ended August 21st can be found here.
Economics & Politics
The week’s economic news started with Japan announcing its worst decline in GDP in 40 years as GDP fell 7.8% in the second quarter compared to first quarter, an annualised decline of 27.8%. This was largely in line with expectations, although Japan has now experienced three consecutive quarters of GDP decline, the worst performance since 1955 according to the BBC.
There was further concern mid-week with double-barrelled so-so news coming Stateside, first as the Federal Reserve released the FOMC minutes (meeting July 28-29) on Wednesday followed by first-time jobless claims on Thursday. The minutes from the late July Federal Reserve meeting indicate that the bank has lowered its forecasts for 2H20 growth and improvement in unemployment because of the resurgence of CV19 in certain states in July. This can hardly have been a surprise, and indeed, it really didn’t affect sentiment in the financial markets beyond a couple of hours. Rates and the current QE programme were left intact, as the Fed suggested that the next step should be further fiscal – not monetary – stimulus. Thursday’s first-time jobless claims (week ended August 15th) report disappointed as the U.S. economy took a step in the wrong direction, with claims going above 1 million for the week. You can find the report containing weekly first-time unemployment claims from the Bureau of Labor here. I also found the report Friday from the Bureau of Labor Statistics on state unemployment interesting, and you can find this report here. The seasonally adjusted unemployment rate for July for the U.S. was 10.2%. The worst three states were Massachusetts (16.1%), New York (15.9%) and Nevada (14.0%), and the best three were Utah (4.5% ), Nebraska (4.8%), and Idaho (5.0%). On a more constructive tone in the States, the Democrats in Congress signalled to the Trump Administration that they are willing to compromise so as to close the gap holding back a 4th round of fiscal stimulus, largely expected in the coming weeks.
There have been several articles in the financial press during the past week suggesting that the European economy was struggling and, as a result, the European equity markets have probably seen their best days for the time being. Data seemed to bear this out as Eurozone Markit manufacturing and services PMI data was worse than expected, following on the heels of disappointing industrial production and unemployment figures for July released the week before. Occasional flair-ups of CV19 across Europe, especially on the Mediterranean coast as people flock there for holidays, are also not helping.
The U.K., on the other hand, had better-than-expected Markit manufacturing and services PMI for July, and retail sales also came in better than expected for July, exceeding February levels. Boris Johnson’s government has been quick to address CV19 hotspots domestically and to quickly impose 14-day quarantine restrictions on U.K. citizens returning from countries with increasing cases of CV19, and this strategy seems to be paying off. Still, there remains the small matter (sarcastic) of cutting post-BREXIT trade deals as time winds down quickly. Both Sterling and the Euro suffered this week as the lack of an agreement begins to look more and more likely, a negative for both the E.U. and the U.K.
Politically last week, the Trump Administration brokered an agreement leading to the normalisation of relationships between Israel and the U.A.E., a genuine step forward in the on-going quest for peace between the Jewish state and Arab states in the Middle East. The Democrats held their four-day convention (virtually) last week, formally nominating the ticket of Joe Biden and Kamala Harris. The Republic convention begins Monday to formalise the nomination of incumbent President Trump. The U.S. Presidential race is upon us and will undoubtly play an increasingly influential role as far as market sentiment in the coming weeks, as both parties stake out their ground and set forth their political agenda for the coming four years.
COVID-19
The world is approaching 23 million cases of CV19 and 800,000 deaths, as you can see from this table (data source: Johns Hopkins, updated morning of August 22nd):
Over 50% of reported cases are in three countries – the U.S. (5.6 million), Brazil (3.5 million) and India (3 million). I believe that the combination of trends and the growth of infection rate are more relevant statistics, and I caution that reporting from country to country most certainly varies. However, what is increasingly clear is that countries which quickly address hotspots to snuff out resurging growth eventually benefit economically, whilst others with less conviction and / or suspect leadership flounder. The U.K. seems to be in the “more aggressive” camp, or at least it feels that way at the moment to the chagrin of many travellers that are currently out of the country for holidays and are being given 48 hours notice to return home so as to avoid facing a 14-day quarantine. Following the addition of The Netherlands and France the week before, both Austria and Croatia were added to the list at the end of last week. The U.S. remains on the U.K. quarantine list, and there is officially no travel corridor open between the E.U. and the U.S.
It is clear that cases and deaths from CV19 can worsen in any place and at any time. The ongoing challenge for governments is to show leadership in establishing the appropriate balance between economic growth and deaths from coronavirus, a balance that has – and will likely never have – an entirely clear answer.
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