Summary
Equity markets were slightly more subdued last week, but not in the U.S., where the S&P 500 notched another weekly gain of 1.8%. FAANG+M stocks continue to be the star performers, but Tesla – on the verge of breaking into the S&P 500 index - is having a pretty good run, too.
S&P 500 earnings start this week, with the banks featured as over 100 companies will report their quarterly results.
The U.K. market continues to lag badly due to a combination of CV19 economic woes and slow progression on the post-BREXIT trade deal with the E.U. Of the indices I don’t track regularly, the Shanghai Composite is particularly strong, reaching its 2019 close in early July and surging 7% last week.
Credit was slightly better, but overwise had an uneventful week.
Gold went above $1,800/ounce, its highest level since 2011, and closed the week just shy of this mark at $1,799.30/ounce. Treasuries were slightly better, and both the Yen and US Dollar weakened.
WTI oil was about flat on the week but held above $40/barrel.
The U.S. is in the spotlight as parts of the country are experiencing a resurgence in CV19 cases, with the federal government leaving it to the states to sort out. #POTUS did don a mask for the first time, and Brazilian President Jair Bolsonaro was diagnosed with the virus.
Global Equity Markets
Equity markets were not particularly inspiring this week, although the S&P 500 showed a solid gain and has had a good start to 2H2020. Although the tech and healthcare heavy NASDAQ closed above its pre-CV19 high on June 8th, the more diverse S&P 500 still remains below its 2019 close but by a scant 1.4%. It is certainly inching closer. Although the recent ascent has been more measured, it does feel like we are going to get there. Who could have predicted this fast and sharp of a recovery by the S&P 500 in mid-March, amidst the severe sell-off as markets were one-directional with investors fleeing for the exits. Oh, how times have changed!
To be fair, the recovery has been more mixed outside of the U.S., with the exception of China. The Shanghai Composite Index (SHCOMP), which passed its 2019 closing level on July 2, added 7% last week in spite of weakness on Friday. On the other end of the spectrum, the FTSE 100 has continued to lag as it has the entire post-recovery period, as the U.K. economy struggles against both the economic effects of CV19 (downturn in economy is expected to be the worst in 300 years) and the slow-moving negotiations with the E.U. on post-BREXIT discussions. Here’s how the indices I tracked performed last week.
Market volatility also continues to subside as the uplift strengthens and gains consolidate. The VIX fell below 30 in late June and has remained mostly south of 30 since then, suffering a small blip on Thursday but closing the week at 27.29. It is fairly clear that the combination of poor U.S. (and global) economic data and ongoing growth in CV19 cases in the U.S. does not seem to matter at all to investors.
FAANG+M, and Tesla
The FAANG+M (Microsoft) components have been on fire, as they have throughout the recovery, with returns for the year ranging from 15.3% (Alphabet, aka Google) to 73.2% (Amazon). Amazon has crossed $3,000/share, Netflix has crossed $500/share and Apple is closing in on $400/share. On a market-weighted basis, the FAANG+M stocks, collectively, have returned over 35% YtD versus a decline in the S&P 500 of 1.4%, and – as you might expect – their relevancy in the S&P 500 has increased from 19% at year-end 2019 to 26% at Friday’s close. Remember when there was discussion of AMZN, AAPL and MSFT flirting with $1 trillion market caps? Now four of the six stocks have market caps in excess of $1 trillion – AAPL ($1.69 trln), MSFT ($1.64 trln), AMZN ($1.62 trln) and GOOG ($1.07 trln).
The graph to the left is a reminder of how well these stocks have performed since 2012, and how important they are to the performance of the S&P 500 overall. In this graph, the S&P 500 is the bottom line (worst relative performer), and the graph excludes NFLX because of its very strong relative performance over the period (53.4x price in 2012, whilst next closest is AMZN at 14.6x) distorts the scale of the graph. I have written about the FAANG+M stocks in the past in my blog, and you can find two of the articles here (February 5th) and here (May 19th). I have also covered Netflix in two posts here (February 14th) and here (April 17th). And lastly, I wrote about Microsoft, one of my favourite holdings, here (April 2).
As much as I would like to ignore Tesla as an aberration, it’s hard to not mention that TSLA shares have returned a whopping 269.2% in 2020, putting all the #FAANG+M components to shame. TSLA’s shares closed on Friday at $1,544.65/share vs a year-end close of $418.33/share and vs the 2020 low of $361.22 (March 18th). For those that follow emonringcoffee.com, you will know I harbour severe reservations about the value of TSLA, although the fact is that I have been hugely wrong so far. I share some similar, although not as severe, reservations about #NFLX. In both cases, my concerns revolve around the role played by short sellers in the sharp ascents of both stocks, because I believe that valuations, especially for TSLA, are largely divorced from fundamentals. I am preparing an article on this now. Should you wish to see what I have written about Tesla in the past, which are a bit painful even for me to read given how the stock has performed, you can find them here (Jan 7th), here (Jan 10th) and here (Feb 13th).
S&P 500 Earnings
As is traditional, the banks will steal the spotlight this week as 2Q2020 earnings kick-off, including JP Morgan, Citibank and Wells Fargo all reporting on Tuesday, followed by PNC, Fidelity, Goldman Sachs, Bank of American, Morgan Stanley, Blackrock and State Street, amongst others, throughout the rest of the week. Complementing the banks are a slew of corporates, too, including the likes of Pepsi, (Monday), Delta (Tuesday), UnitedHealth (Weds), Netflix (Thurs) and J&J (Thurs). I counted around 125 U.S. companies that will report earnings this week, and you can find the calendar on Yahoo Finance here. Refinitiv is projecting 2Q2020 earnings for the S&P 500 to be down 44% compared to 2Q2019, largely factored into prices already. As we saw in 1Q2020 results, the more relevant benchmark for earnings is actual results versus consensus expectations, not the Y-o-Y change.
Credit Markets
Credit spreads were slightly volatile on the week but overall tighter by 3bps – 6bps across the credit curve, from BBB corporates to CCC corporates.
To remind you, the graph to the left shows the trend in U.S. corporate spreads this year (BofA index) for BBB (investment grade), BB, B and CCC rating categories (latter three high yield).
Safe Haven Assets & Oil
In the world of safe havens, the big news last week was gold, which surged past $1,800/ounce on Wednesday for the first time since 2011, before falling back on Friday to close the week at $1,799.30/ounce, up 1.4% on the week. Gold has most certainly outshone nearly all asset classes including equities this year, as the YtD return for gold is 18.8%. U.S. Treasuries were modestly better on the week, and both the US dollar and the Yen weakened.
Oil was about flat on the week, as WTI held its price above $40/barrel all week, closing Friday at $40.62/barrel.
Economics & Politics
There was no economic data reported last week that was significantly out of line with expectations. Rishi Sunak, the U.K. finance minister, announced an additional £30 bln package of stimulus measures on Wednesday targeted at furloughed workers, housing and the entertainment sector, to protect workers and assist the economy. In the U.S. – and to my surprise – a second round of fiscal #stimulus has still not been agreed as the economy grows nearer to the end of July, when the supplemental $600/week in federal unemployment income expires. This on-going discussion is sure to gain momentum in the coming days, as concerns about the pace of the U.S. recovery come under renewed pressure from the increase in CV19 cases especially in the western and southern United States.
COVID-19
The U.S. passed 3 million cases of CV19 last week according to Johns Hopkins. The U.S. has the most cases of CV19 of any country in the world (now over 3.2 million), followed by Brazil (1.8 million), India (821 thousand), and Russia (719 thousand). States in the west and
south continue to see cases of CV19 grow, resulting in the U.S. trailing most developed countries as far as flattening the growth curve of CV19. The table to the right shows the weekly trends in cases and deaths of CV19 globally, which have now passed 12.5 million cases globally and over 560 thousand deaths.
Brazilian President Jair Bolsonaro was diagnosed last week with CV19, and President #Trump appeared for the first time in public with a face mask, perhaps finally acknowledging the severity of CV19 as it continues to spread in the U.S.
Conclusion
Markets had reason to pause last week as CV19 reasserts itself in the U.S. and economic data remains dire albeit more or less in line with expectations. On the horizon, investors need to carefully monitor how the U.S. deals with resurgent CV19, the development of a second fiscal package in Congress, and upcoming 2Q2020 earnings which kick off this week.
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