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Commentary provided by John Packs, Senior Investment Officer, AIG Retirement Services

Weekly Market Performance Snapshot (Week ending July 17, 2020)

  • Dow Jones Industrial Average®: +2.3%
  • S&P 500® Index: +1.3%
  • NASDAQ Composite® Index: -1.1%
  • Russell 2000® Index: +3.6%
  • 10-year U.S. Treasury bond yield: 0.623%, down 1.3 basis points from 0.636% on July 10
  • Best-performing sector this week: Industrials, +5.8%
  • Weakest-performing sector this week: Consumer Discretionary, -1.6%

Virus Concerns and Vaccine Hopes Move Equity Markets

Health-related news drove the movements in the equity markets this week. Surging virus case counts in the U.S. South and West raised concerns about the endurance of the economic recovery. Moderna’s announcement about progress in its vaccine trials gave equities a mid-week boost. Technology stocks paused their remarkable run, as some investors realized gains and awaited earnings results.

  • June’s retail sales report showed a 7.5% increase for the month, as physical stores reopened. This followed May’s historic 17.7% jump in sales. However, optimism was tempered by concerns about rising infections leading to a rollback of re-openings in many states.
  • In addition to Moderna’s announcement that its vaccine candidate produced an immune response in test subjects, Johnson & Johnson announced that it is moving forward with multiple vaccine trials in various phases. Dr. Anthony Fauci said he’s “cautiously optimistic” that a safe and effective vaccine can be developed by early 2021.
  • The weekly jobless claims report showed that 17.3 million people are receiving continued unemployment benefits. Although the number is drifting downward, it is still exceptionally high.
  • American Airlines warned employees that upwards of 25,000 furloughs could be coming after October 1 if air travel demand remains subdued. The news followed a similar warning last week from United Airlines.
  • Technology stocks took a breather this week. Upcoming earnings reports could provide insight into how tech companies are adapting to economic challenges, and whether smaller tech names that have enjoyed strong gains can continue their upward momentum.
  • International oil producers agreed to ease supply cuts starting in August, amid reports that oil demand has bottomed and will rise incrementally as economies recover.

Bank Earnings Suggest Caution on Economic Outlook

Several major banks reported second quarter earnings. JPMorgan Chase, Goldman Sachs, and Morgan Stanley all reported solid quarters, thanks to revenue from trading operations. However, the consumer-facing business lines at banks such as Wells Fargo, Citigroup, and Bank of America struggled.

  • Banks with large consumer credit exposure reported higher than anticipated loan-loss reserves for the quarter. With economic uncertainty remaining very high, banks are expecting many consumers to face challenges making their loan payments.
  • Federal Reserve officials were out in force making the case for caution on the economic front. Fed Board Member Lael Brainard said, “The pandemic remains the key driver of the economy’s course. A thick fog of uncertainty still surrounds us, and downside risks predominate.” Patrick Harker, president of the Philadelphia Fed, said, “We aren’t going to see a smooth recovery until the virus is controlled and contained.”
  • A big unknown at the moment is how large the next federal relief and stimulus package will be, and where aid will be directed. With enhanced unemployment benefits ending at the end of this month, Congress is facing pressure to act soon.
  • Looking even further down the road, new research from Goldman Sachs sees gains from the S&P 500® averaging 6% over the next 10 years, down from 13.6% over the past decade. Equities are expected to outperform bonds. As with any forecast, there are risks that could alter projections. The report stands as a reminder to not assume past gains will continue into the future.
  • For those planning for retirement, saving as much as possible will continue to be key. Given heightened uncertainty about the future, investors should consult with a financial professional about their investment objectives.

China Returns to Growth, but Political Tensions Persist

China, the first country to report coronavirus cases, is now experiencing positive economic growth again. China’s GDP grew by 3.2% in the second quarter, compared with the same quarter last year. This follows a contraction of 6.8% in the first quarter, when the country was gripped by the virus.

  • Given the importance of international trade to China’s economy, the ongoing challenges for economies around the world could pose trouble for China’s growth.
  • China also faces continued backlash against its efforts to impose greater control over Hong Kong. President Trump signed bipartisan legislation to sanction Chinese officials and companies over the Hong Kong national security legislation.
  • The president also issued an executive order rescinding Hong Kong’s special political and economic status, saying, “Hong Kong will now be treated the same as mainland China.” The move could have implications for U.S. companies’ ability to do business with companies in Hong Kong—particularly with respect to national security and intellectual property.
  • Citing national security, the UK government announced that it will prohibit purchases of Huawei 5G equipment as of the end of this year, and it directed telecom companies to remove any existing Huawei 5G equipment from the nation’s communications infrastructure by 2027.