Index Performance – Week ending 5/15/2020
S&P 500 Index: -2.26%
Dow Jones Industrial Average: -2.65%
Nasdaq Composite: -1.17%
US equities sold off modestly this week. The growth-heavy Nasdaq outperformed among US benchmark indexes, while the small cap Russell 2000 Index dropped more than 5%. Investors looked to take profits as the first wave of states began the reopening process. Questions remain surrounding how quickly activity may return to normalized levels. Early-opening states have not seen a noticeable increase in new cases, though concerns about a second wave in China and South Korea are growing. Poor economic data continued to roll in, concluding the week with Friday’s report for April retail sales, which showed a record 16.4% drop after declining 8.3% in March (see chart).
“One of the reasons for the major decline in retail sales is simply because many businesses are closed,” said LPL Financial Chief Investment Officer Burt White. “As the economy slowly opens back up, retail sales should bounce back, as pent-up demand is there.”
Rising tensions between the US and China added to investor anxieties. This comes amid continued questions surrounding trade.
The best-performing and only positive sector on the week was healthcare, while real estate was the laggard by far. Large cap growth stocks outperformed large value for the week.
The MSCI EAFE and the MSCI Emerging Markets Indexes fell alongside US stocks, though emerging markets outperformed both foreign developed and US equities, losing just over 1% through Friday. There is concern over the future financial relationship between the United States and China after President Trump inquired with the Federal Retirement Thrift Investment Board on its Chinese investments. Moreover, Trump expressed more displeasure concerning China’s handling of its COVID-19 knowledge and is looking into China’s accounting practices for US-listed Chinese companies. How China might retaliate has investors on edge.
European markets were under some pressure with the STOXX Europe 600 down over 3% this week. Like in the U.S., investors are concerned with COVID-19 and the subsequent reopening of the European economy, but equities ended up rallying at the end of the week. On Friday, Germany’s economy shrank at the fastest pace since the 2008 financial crisis, with its gross domestic product (GDP) declining by 2.2%. France and Italy’s GDP declined by 5.8% and 4.7%, respectively.
Fixed Income and Commodities
Yields across the curve moved lower this week amid the risk-off mood. After futures markets last week appeared to price in the possibility of negative policy rates from the Federal Reserve (Fed), several central bankers, including Fed Chair Jerome Powell, again pushed back on the idea that negative policy rates would be implemented to combat the economic fallout from COVID-19. Investors remain skeptical that would be the case should a second wave of infections slow the prospects of a recovery.
Oil prices rallied with June contracts for WTI crude posting a gain of over 10% this week, contributing to another impressive multi-weekly run. The commodity marked its third straight week of gains following the ”supercontango” event that caused front-month contracts to trade negative in April. The dollar was firmer versus most major crosses though this proved immaterial to gold, which ended stronger on the week.
Looking ahead, earnings season winds down, with many big retailers set to report quarterly earnings. Additionally, building and construction are key themes, with the NAHB Housing Market Index next Tuesday and Housing Starts and Building Permits next Wednesday. Both numbers are expected to look weak given the pandemic and social distancing guidelines. Wednesday next week will cover the Federal Open Market Committee minutes, which may be interesting given the level of quantitative easing given the current economic climate. On Thursday, we get another round of new unemployment claims with the hope that claims will continue on a downward trajectory. Moreover, we get some more producer numbers with the Philadelphia Fed Manufacturing Index and Purchasing Managers’ Index.
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