Conway’s QuickTake: Week of August 31, 2020

Here’s What Happened Last Week:

U.S. Equities and Economic Data/News
U.S. stocks rose again last week setting record highs sparked by positive news centered around plasma treatments and vaccines. The S&P 500 Index closed out the week above the 3,500 level for the first time ever with light volumes. Large-cap stocks outpaced both mid and small-caps again as the large-cap growth style outperformed the large-cap value style. Large-cap growth was once again led by the strong returns of the mega-cap technology and communication services companies. All sectors except for utilities rose for the week.

Fed Chair Powell delivered a virtual speech on Thursday which addressed the central bank’s new monetary policy approach to handle inflation. He stated the Fed will be able to tolerate a larger range of inflation targets which should hopefully pave the way for the U.S. economy to achieve a full recovery over the long term. Essentially, instead of targeting a very specific inflation number like in the past, the Fed will now consider the historical inflation level and duration before making any unwarranted monetary policy changes. The initial weekly jobless claims fell by almost 100,000 and was just over one million for the week ending August 22nd. Continuing claims fell by a fraction as well – 14.5 million Americans are receiving some type of unemployment assistance. Although these figures continue to decline, they still represent a highly stressed labor market.

Source iStock: 2020

International Equities and Economic Data/News
Both international developed and emerging markets equities rose, while the former trailed the latter in absolute returns (+1.7% vs +2.8%) as represented by their respective MSCI indices. Europe is dealing with what seems to be the start of a second wave of new cases in several countries including France, Spain, and Italy. Meanwhile Japanese stocks were mostly flat to slightly up as the nation ponders the future of their economy given that Prime Minister Shinzo Abe resigned due to his declining health. Abe instilled various economic policies aimed at expanding the economy. Emerging market equities were largely led by compelling returns from Chinese stocks. The MSCI China Index rose 4% in USD terms, as Alibaba and Baidu produced strong returns. For the year thus far, Chinese A shares have risen about 10% compared to a similar return by the S&P 500 Index. That makes Chinese equities among the strongest performing stocks in the global stock markets.

Germany’s coalition agreed to fund an additional €10 billion to a program that will keep company’s workers on payroll until at least year-end. This news came soon after its gross domestic product contracted at a quarterly rate of 9.7%. France’s Prime Minister Jean Castex plans to announce a €100 billion recovery plan on September 3rd which will support small- and mid-sized companies in conjunction with various new tax cuts. In Asia, the yield on the 10-year Japanese government bond rose to 0.059%, its highest level since the pandemic’s beginning in March. The yield on China’s sovereign 10-year bond increased for the week, indicative of their strengthening economy. Also, Chinese industrial profits spiked nearly 20% in July compared to July from a year ago, although cumulative profits remain at a negative level year-to-date despite the continued economic recovery and growth.

Credit Markets
Credit Markets on average had a negative week, as most bonds declined across the board. This decline was largely attributable to the increase and steepening of the yield curve. The 10-year Treasury rate ended at 0.71%, an increase of 0.15% from the week prior. In fact, the spread between the 5-year and 30-year rates increased to 112 basis points, its steepest level in more than a month. Corporate bonds fell despite a strong week of new issuance, as approximately $42 billion was issued versus expectations around $30 billion. Thus far the year’s total corporate bond issuance is about to surpass 2017’s record year of $1.33 trillion, and it’s only August. Municipal bonds have undergone extensive measures of refinancing over the past two months as states and government municipalities took advantage of the record low yields. The category also benefitted from its 14th straight week of inflows, adding $2.3 billion in total.

Sustainable Spotlight (Perspectives from our partners at Seeds): Does FAANG really belong in an ESG portfolio?
-ESG advocates and detractors alike continue to question the inclusion of large cap tech giants in funds that incorporate ESG metrics in the investment process. While more tech-focused firms can have lower environmental risk exposures by nature, these companies continue to face controversies over data privacy, labor issues, and unfair monopolistic practices.
-Meanwhile, many ESG funds have attributed strong performance to overweighting these large cap tech stocks, especially during the COVID-19 crisis. For the year ending July 27, eight of the top 10 performing large cap US funds that incorporate ESG metrics included Apple, Amazon, or Microsoft as their largest holding, according to Morningstar. Meanwhile, those 10 funds had about 12% concentration in the FAANG stocks (Facebook, Amazon, Apple, Netflix, and Alphabet).
-Facebook, for example, which continues to draw criticism over data privacy and misinformation controversies, ranks among the top 10 holdings of one of the largest “socially aware” mutual funds as well as another $7.9 billion “social index” fund.
-As Wolfgang Kuhn, Director of financial sector strategies at ShareAction, a responsible investment charity, explained, “The man on the street would definitely be surprised about those companies’ inclusion in ESG funds.”

Looking ahead…
Monday, August 31, 2020

•Japan Unemployment
•China Caixin Manufacturing Index
Tuesday, September 1, 2020
•US ISM Manufacturing Survey
Wednesday, September 2, 2020
•China Caixin Services Index
Thursday, September 3, 2020
•US Jobless Claims
•US ISM Services Survey
Friday, September 4, 2020
•US Nonfarm payrolls
•US Unemployment

Sources: The WSJ, T. Rowe Price Global Markets Weekly Update, Piton Investment Management, Seeds Investor

Data in this report is obtained from sources which we believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. It is provided for your information and guidance and is not intended as specific advice and doesn’t not constitute an offer to sell securities. Consult your financial professional before making any investment decision. Past performance is no guarantee of future results. Diversification/asset allocation does not ensure a profit or guarantee against a loss. The Wilshire 5000 Total Market Index measures the performance of all U.S.-headquartered equity securities with readily available price data. The Standard & Poor’s 500 Index (S&P 500) is an unmanaged group of securities considered to be representative of the stock market. The Russell 2000 Index is a market-cap weighted index comprised of the smallest 2,000 companies within the Russell 3000 Index, a larger market-cap index made up of the largest 3,000 publicly traded companies in the U.S., nearly 98% of the investable U.S. stock market. The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI Europe Index captures large- and mid-cap representation across 15 Developed Markets countries in Europe, covering approximately 85% of the free float-adjusted market capitalization across the European Developed Markets equity universe. The MSCI Emerging Markets (EM) Index captures large- and mid-cap representation across 26 Emerging Markets countries, covering approximately 85% of the free float-adjusted market capitalization in each country. The MSCI Japan Index captures large- and mid-cap representation of the Japanese market, covering approximately 85% of the free float-adjusted market capitalization in Japan. The Bloomberg Barclays U.S. Aggregate Bond Index is a market capitalization-weighted index comprising Treasury securities, Government agency bonds, mortgage backed bonds, corporate bonds, and some foreign bonds traded in the U.S. The Bloomberg Barclays Global Aggregate Ex U.S. Index measures the performance of global investment grade fixed-rate debt markets that excludes USD-denominated securities. The Bloomberg Barclays Municipal Bond Index covers the U.S. dollar-denominated long-term tax-exempt bond market. Created by the Chicago Board Options Exchange (CBOE), the Volatility Index, or VIX, is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility. Data in this newsletter is obtained from sources which we, and our suppliers believe to be reliable, but we do not warrant or guarantee the timelines or accuracy of this information. Consult your financial professional before making any investment decision. Past performance is no guarantee of future results. Diversification/asset allocation does not ensure a profit or guarantee against a loss.