Markets pause to assess risk from coronavirus rebound
JUN. 29, 2020
The market has entered a period of directionless volatility following the impressive rally from the March lows. Investors’ optimism on the economy’s reopening has been met with resistance, as headlines are focused on the rebound in coronavirus cases. Markets are modestly lower for the month, as momentum and investor sentiment have stalled. A pause in the market is not unexpected or unhealthy following the severity of the recent increase.
For the first half of the year, a wide performance gap developed between areas in the market. The Russell 1000 Growth outperformed the Russell 1000 Value by 24% (+9% vs. -15%), large capitalization outperformed small by 9% (-3% vs. -14%) and domestic outperformed international by 5% (-6% vs. -11%). These are continuations of trends seen over the past several years. A reversal is expected in the earlier stages of the recovery, as the underperformers tend to be more cyclical and higher beta, though certain structural advantages are supporting the groups that have outperformed.
Coronavirus cases are moving higher, with Friday’s reported seven-day average of 45,255 more than 40% higher than a week ago. Several southern and western states that are seeing the largest rise are pausing or reversing their reopening plans. Equity markets are pricing in an optimistic view of reopening, so a stall could make market vulnerable.
Rhetoric between the U.S. and China remains intense, with increased focus on antitrust criticism. Recent back-and-forth actions, including blacklisting each other’s companies, restricting flights and expelling journalists, are expected to continue at least through the election. It is not clear whether President Trump or nominee Biden will take a tougher line with China, as Biden has described President Xi Jinping as a thug, labeled mass detention of Uighur Muslims as unconscionable and accused China of predatory trade practices. The conflict with China has masked the developing situation with Europe, where the E.U. is threatening a global digital tax, while the U.S. threatens retaliatory tariffs.
Economic data continues to reflect the reopening of the economy. PMI data and durable goods saw substantial gains, indicating that manufacturing and other business activity is recovering. Consumer spending surged by 8.2% in May, partially recovering from the record drop in the past two months of 6.6% in March and 12.6% in April. The level remains 9.3% lower than a year ago. Personal income, however, fell by 4.2% after spiking by 10.8% last month on falling unemployment aid and the impact of the $1,200 stimulus checks. The rebound in economic activity could stall, as some high-frequency data reflects slowing from the rise in coronavirus cases.
The IMF slashed its forecast for the global economy and warned of soaring debt levels in the latest World Economy Outlook. Global GDP is set to drop 4.9%, lower than the -3% expected in April, with the U.S. expected to decline by 8% and Europe by 10.2%. Growth in 2021 is expected to rebound to +5.4%, though that is lower than the 5.8% expected in April.
What to Watch
This week could see heightened volatility around quarter-end positioning. Economic data include pending home sales Monday, consumer confidence Tuesday, ISM manufacturing on Wednesday, and monthly payrolls and durable goods on Thursday. The market is closed on Friday for observation of Independence Day. The payroll number will be the most market-moving due both to investor attention and the unpredictability. Consumer confidence is also important, as the consumer’s willingness and ability to spend is critical to continue the recovery.
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