July Market Recap
August 3, 2020
Virus? What virus?
You’d never know we were in the midst of a global pandemic by watching the stock market last month. The only thing spreading on Wall Street these days seems to be optimism.
Despite the spread of coronavirus and the corresponding American death toll both accelerating in July, US equity prices remained largely immune from worsening public health conditions. Stocks surged enough for the S&P 500’s year-to-date return to turn positive; truly incredible when you consider the economic context.
Although second quarter corporate earnings and GDP data confirmed expectations of the largest year-over-year decline in our nation’s history, enough bad news was priced in that markets weathered the deluge of negative numbers like it was more of a drizzle.
All but one of the 11 sectors in the S&P were firmly positive (+3.8% or better) in July. Consumer Discretionary, Utilities, and Materials all gained more than 7%. Only Energy (-5.1%) failed to move higher.
|Index||July 2020||YTD 2020|
For the entirety of this stock recovery, it’s been a tale of two market caps. Led by big technology companies, larger-capitalization companies have performed considerably better than small- and mid-caps. That trend continued in July with the S&P 500 (+5.5%) doubling the return of the Russell 2000 (+2.7%).
Looking beyond the broader indices, it wasn’t so much “up days” and “down days” as it was the “stay-at-home” stocks vs more cyclical industries. In other words, ugly reports about new COVID-19 diagnoses or lack of policy progress didn’t generate a widespread selloff. It just tilted the seesaw from one category of stocks to the other.
Second quarter GDP fell nearly 33% from a year earlier, the worst short-term economic contraction in American history. New unemployment claims, as of July 30, also increased for the second consecutive week, according to the US Labor Department. The latter is evidence of the economic backslide in many US states as a resurgence in coronavirus cases caused another round of business closures.
Quarterly earnings for Big Tech delivered, sending the NASDAQ at least 6% higher for the fourth month in a row. Not even Congressional testimony given by the CEO’s of Apple, Facebook, Amazon, and Alphabet (Google) could slow the steamrolling those stocks and their shareholders have enjoyed. Anti-trust concerns will likely lead to the break-up of those companies eventually, but politicians have more important priorities and any such action is likely years down the road.
Speaking of which, Congress failed to pass a second round of fiscal stimulus prior to its scheduled August recess. It’s still unthinkable (especially in an election year) that another trillion-dollar package isn’t coming from Capitol Hill, which is why equities have not yet reacted negatively to political delays. It’s simply a matter of “when” and “how much” regarding the next oversized batch of federal government aid.
Federal Reserve Chairman Jerome Powell acknowledged on July 29 that “The path forward for the US economy is extraordinarily uncertain and will depend in large part on our success keeping the virus in check.” Officially, Fed policy remains unchanged with Powell reiterating that rates will stay exceptionally low for an extended period of time.
Ten-year US Treasury yields fell to 0.54% as of July 31, down from 0.65% a month earlier. Crude oil rose slightly to $40.27 per barrel, though that didn’t stop energy stocks from sliding further.
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