Stocks
Fed Chair Jerome Powell // Getty Images
All three major indices ended the week down at least 2%. The tech-heavy NASDAQ fared the best, falling only 2.4%, while the Dow and S&P fell 5.6% and 4.8%, closing at 25,605.54 and 3,041.31, respectively. This after the NASDAQ broke through its previous all-time high from February 19 of 9,838.37 after closing at 10,020.35 points on Wednesday, June 10, indicating tech companies’ resiliency to downward market sentiment relative to its non-tech peers.
For weeks I’ve been saying the recent rally has been unwarranted given the bleak economic data, particularly rife unemployment and the prospect of a second wave of coronavirus infections. The market had been ignoring those signals but then appeared to have a wake-up call on Thursday after it had time to digest new developments, including reports of a surge in covid hospitalizations and Fed Chair Jerome Powell’s comments on Wednesday following the FOMC meeting that same day.
Although the rate of positive covid tests has fallen in the US as a whole, dropping from 14.4% in mid-April to 9.3% as of June 10 (Source: The Covid Tracking Project), rates of infection are picking up in Arizona, Texas and Utah, among other states. Texas and Utah reopened May 1st, while Arizona reopened on May 15. The rise is attributable to people letting down their guard and not continuing preventative measures, including using masks and social distancing, especially as we enter summer and interpret the reopening of the economy as a message stating “the coast is clear.”
The Federal Reserve certainly doesn’t think we’re out of the woods just yet, indicating on Wednesday they intend on holding rates near zero through next year and possibly through 2022. Powell acknowledged there are still 20 million more people unemployed than there were in February, and that it will be a “long road to recovery” as many of those unemployed may not get their old jobs back as consumer and business behavior has changed as a result of the pandemic. He also indicated that rather than gradually reduce its asset-purchasing, the Fed would commit to the buying of “at least $80 billion in Treasurys and $40 billion in mortgage securities, net of maturing bonds, a month” to ensure the smooth-functioning of financial markets.
Treasurys
As stocks rallied last week, so did Treasury yields, although a bit prematurely (yields rise as prices fall). They reached as high as 0.959% last week before falling back to 0.698% on Friday, as market participants sold off safety assets and fed into the stock market frenzy but realized the factors behind the stock rally, growth and inflation, may not materialize any time soon. It is quite interesting that bond yields remain suppressed despite the resurgence in stocks, perhaps indicating that the “smart money” is still waiting on the sidelines in safe-haven assets until growth and inflation expectations truly pick up.
Energy
Crude’s six-week rally came to an end last week, declining 8.3% while joining the selloff in stocks, reaching $39.60 per barrel last Wednesday and closing the week at $36.26 (it’s currently trading at $35.73 at the time of this writing). Much of the same reasons causing the decline in equities apply to the fall in crude, including the Fed’s comments regarding the still-weak economy as well as a resurgence in covid cases not only in the US but China also. OPEC is scheduled to hold a meeting this Wednesday to assess their recent decision to extend supply cuts and may consider additional measures.
Tuesday - Retail Sales and Business Inventories
Wednesday - Housing Starts
Thursday - Initial Jobless Claims
Friday - Q1 Current Account Deficit