Conway’s QuickTake: Week of June 15, 2020

Here’s What Happened Last Week:

U.S. Equities
U.S. Equities had their worst week in almost three months as previously suppressed coronavirus concerns boiled to the surface. A comment from Fed Chair Jerome Powell indicating a long and slow recovery also seemed to spook investors. The S&P 500 Index ended the week off nearly 5%, although some sectors had considerably worse losses. Value and more economically sensitive stocks started out the week on a strong note but were then hit the hardest when the market abruptly sold off Thursday. In particular, the energy (-11.0%) and financials (-9.3%) sectors had the largest losses. The industrials and materials sectors also had sizeable losses of 8% each. Prior market leadership resumed and sectors that favor the ‘stay at home’ economy, such as IT (-2.0%) and communication services (-2.8%), fared better. In line with a risk-off mentality, small-caps dramatically underperformed large-caps with the Russell 2000 Index falling nearly 8% over the week. The spread between the Russell 1000 Growth and the Russell 1000 Value was also notable at 4%, favoring growth. Performance of these indices are 20% apart so far this year, with the Russell 1000 Growth Index up 5.4% compared to the Russell 1000 Value Index’s 15.7% decline.

As most states are either reopened or in the process of doing so, infections appear to be on the rise. More specifically, the states that had fared better previously, such as Arizona and Texas, are now seeing some of the largest spikes. It is possible that this is a continuation of the first wave versus the emergence of a widely feared ‘second wave.’ Also, greater availability of testing could also be contributing to the increased number of positive cases. Otherwise, most of the data or economic news was on par with or exceeded expectations. For instance, weekly jobless claims were still high at 1.54 million but declined for the 11th consecutive week. The University of Michigan’s preliminary gauge of consumer sentiment surprised to the upside. Additionally, most indicators suggest that another fiscal stimulus package is highly likely.

Source: iStock 2020

International Equities
International Equities also suffered losses last week, although they generally exceeded domestic market counterparts. The developed, non-U.S. MSCI EAFE Index declined 2.9% for the week, while the MSCI Emerging Markets Index was only off 1.5%. Relative strength was mostly found within developed and emerging markets in Asia as the fall in European equities more closely mirrored U.S. markets.

In Europe, many major constituent countries continued to see residual effects of prior lockdowns. In the U.K., GDP fell by a record 20.4% in April from March. The economy also contracted by nearly 25% on a year over year basis, bringing GDP near levels last reached in 2002. Despite these grim figures, there are signs that the U.K. economy is beginning to recover in May and the Bank of England appears committed to expanding the level of stimulus. Data in Germany was also disappointing, as industrial output and trade data came in below expectations. In France, estimates indicated that the economy would shrink by 15.3% over Q2. To help ensure stability through this period, the ECB is looking to extend the ban on bank dividends and buybacks. In Asia, Japan faces similar disappointing growth metrics and the OECD now predicts that the Japanese economy will fall 6.0% in 2020 versus prior forecasts of 0.2% growth. China continues to be the farthest along in the reopening effort, although some of positive signals of a recovery could be fueled by broad credit growth throughout the economy.

Credit Markets
Credit Markets were mixed as yields generally fell while spreads widened. The representative 10-year U.S. Treasury yield fell from higher levels reached last week and closed the period at just below 0.70%. A risk-off sentiment was broadly reflected in the fixed income market, with treasuries outperforming most credit sensitive asset classes. Municipals also underperformed treasuries but held up well compared to much of the broader market. Demand for municipals has been robust the past several weeks after an unusually tumultuous period in March and April of this year. Corporate credit spreads generally widened, most directly impacting the high yield sector, which was negative for the week. Despite negative performance last week, the high yield portion of the market continues to receive robust inflows.

Looking ahead…
Tuesday, June 16, 2020
•US – Industrial Production
•Japan – Bank of Japan policy rate decision
Wednesday, June 10, 2020
•UK – CPI, year-over-year
Thursday, June 11, 2020
•US – Philly Fed survey, Jobless Claims
•Japan – Core CPI

Resource of the Week:
If anyone has experience investing through economic crisis, it is Jeremy Grantham, co-founder and Chief Strategist of GMO. As he notes, this is the fourth major economic crisis of his career, each of which he’s learned many informative and often painful lessons from. In this episode of the Invest Like the Best podcast, Jeremy discusses the current crisis, which he notes is the most uncertain yet. He also speaks about commodity-based companies, and how opportunity often lies between fields of expertise.

Sources: Trading Economics, The WSJ, T. Rowe Price Global Markets Weekly Update

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.