Commentary provided by John Packs, Senior Investment Officer, AIG Retirement Services
Weekly Market Performance Snapshot (Week ending July 31, 2020)
- Dow Jones Industrial Average®: -1.6%
- S&P 500® Index: +1.7%
- NASDAQ Composite® Index: +3.7%
- Russell 2000® Index: +0.9%
- 10-year U.S. Treasury bond yield: 0.537%, down 4.9 basis points from 0.586% on July 24
- Best-performing S&P 500® sector this week: Information Technology: +5.0%
- Weakest-performing S&P 500® sector this week: Energy: -4.2%
Monthly/YTD Performance Snapshot
- Dow Jones Industrial Average®: +2.4% / -7.1%
- S&P 500® Index: +5.5% / +1.2%
- NASDAQ Composite® Index: +6.8% / +19.8%
- Russell 2000® Index: +2.7% / -11.3%
- 10-year U.S. Treasury note yield: down 12.1 basis points from 0.658% on June 30 / down 138 basis points from 1.92% on Dec. 31
Amid Record GDP Drop, Fed Calls for Action
U.S. GDP contracted at a 32.9% annualized rate in the second quarter—the worst decline on record. While the headline figure was stark, it reflected a particularly tough period for the economy, as the pandemic forced businesses to close. (On a year-over-year basis, the U.S. economy was 9.5% smaller than in the same quarter of 2019.) Eurozone GDP suffered even more, falling at a 40.3% annualized rate in the second quarter.
- Potentially more worrisome than the U.S. GDP number was a second straight week of increases in weekly jobless claims, up to 1.43 million. The number of people receiving ongoing unemployment benefits for at least two consecutive weeks also rose, to just over 17 million. The numbers deepened concerns that the economy may be stalling again amid a surge in coronavirus cases and the resulting reductions in economic activity.
- The U.S. Federal Reserve kept interest rate policy steady, with a target range for the federal funds rate between zero and 25 basis points. The Fed also extended emergency loan programs through at least the end of the year.
- In his post-meeting press conference, Fed Chair Jerome Powell expressed concern that a virus resurgence in July has slowed the recovery, noting early data points that suggest consumers are reining in spending: “We have seen some signs in recent weeks that the increase in virus cases and the renewed measures to control it are starting to weigh on economic activity. For example, some measures of consumer spending, based on debit card and credit card use, have moved down since late June, while recent labor market indicators point to a slowing in job growth, especially among smaller businesses.”
- Powell also left no doubt about the need for further fiscal support: “The fiscal policy actions that have been taken thus far have made a critical difference to families, businesses, and communities across the country. Even so, the current economic downturn is the most severe in our lifetimes. It will take a while to get back to the levels of economic activity and employment that prevailed at the beginning of this year, and it will take continued support from both monetary and fiscal policy to achieve that.”
- Democrats and Republicans continued to negotiate the details of a new round of fiscal stimulus. With expanded unemployment benefits now expiring, the scope of future benefits and any direct payments to individuals are at the center of discussions. Liability protections for businesses and funding for schools and other state and local entities are also pivotal to the discussions and to the economy. Lingering uncertainty on fiscal policy could lead to greater market volatility.
Big Technology Stocks Deliver on Earnings, While Economic Weakness Weighs on Treasury Rates
After surging through the first half of the year, technology stocks slowed their pace in early July, as investors awaited earnings reports to see how well companies were performing in the current environment and how much potential growth lay ahead. By and large, the mega-cap technology companies delivered solid earnings and the tech-heavy NASDAQ Composite® Index outpaced other major indices for July.
- Four of the largest technology companies reported earnings this week. Alphabet (Google’s parent company) reported its first-ever revenue decline, amid softer ad sales. Facebook beat revenues and earnings estimates but showed slower revenue growth. Amazon continued to benefit from the surge in online shopping. Apple announced historically high revenue and a 4-for-1 stock split, which may make the company’s shares accessible to more investors.
- The CEOs of Alphabet, Amazon, Apple, and Facebook faced questions from a Congressional committee about their growing power in the marketplace and potentially anti-competitive business practices. As the companies grow in influence, they continue to face calls for additional regulation or breakups.
- Some companies in sectors beyond technology have benefited from the current environment. Procter & Gamble issued a strong quarterly earnings report, thanks to increases in sales of home cleaning and personal health products.
- The yield on the 10-year U.S. Treasury note approached all-time lows, reflecting underlying weakness in the economy, low prospects for inflation, and continuing Federal Reserve bond purchases.
- Health news drove markets throughout July. Surging virus cases raised concerns about the pace of economic growth, while progress on the vaccine and therapeutic front provided optimism. Moderna and Pfizer have begun Phase 3 vaccine trials in the U.S.—the final phase before regulators determine whether a vaccine should be approved. The U.S. and other governments have struck agreements with several pharmaceutical companies to purchase and distribute hundreds of millions of doses once vaccines are approved for widespread use.