- The spread of COVID-19 continues to increase across the United States, centered in the western and southern regions. Texas Governor Greg Abbott rolled back reopening plans, including closing bars and reducing occupancy in restaurants. Other politicians in the affected regions have also warned that pauses in reopening are possible if spread worsens.
- Global purchasing manager surveys showed improvements from last month, although contractions continue throughout the world. U.S. composite activity contracted for the fifth straight month, though the decline was the slowest in four months. Reopening progress worldwide has helped survey numbers move closer to expansion territory.
- U.S. personal income and spending data showed declining government support for the economy, with still-tepid consumption activity. Fiscal support was still extreme, largely due to unemployment insurance payments, though down from April’s individual check-fueled injection. Salaries and wages rose sharply since last month, though not enough to prevent personal income from declining in aggregate. Personal consumption expenditures posted the largest monthly increase on record, though they remain down sharply since last year.
- Performance of U.S. equities remains lackluster. The S&P 500 is approaching mid-year down roughly 7.0 percent, with nine of 11 sectors in negative territory. Information Technology remains a standout, advancing 10.8 percent year-to-date and 3.9 percent for June as of Friday’s close. Conversely, Energy and Financials are the two worst-performing sectors for the year, declining 39.2 percent and 26.5 percent, respectively.
- Several factors have contributed to price declines in late-June: The S&P 500 was due for some consolidation following the 40 percent rally since the March 23 low, companies are in a quiet period leading up to the second quarter reporting period, COVID-19 cases and hospitalizations are rising in southern states, institutional rebalancing is occurring as quarter-end nears, and the change a potential Biden presidency could bring is being considered.
- Second quarter earnings reports are a near-term catalyst. Earnings reporting unofficially begins during the second week of July. Expectations are low, with year-over-year revenue and earnings projected to decline approximately 11 and 43 percent, respectively, according to FactSet.
- The Federal Reserve (Fed) continues to support capital markets through its bond purchase program, although these facilities have significant unused capacity. The Fed has ample bandwidth to expand utilization of existing programs if conditions warrant and have emphasized a commitment to supporting the recovery using all their tools. On Wednesday, the Fed will release minutes from its last meeting, which should provide insight into its approach going forward.
- Corporate bond prices fell last week as investor risk appetite faded. Higher-rated corporate bonds held up relatively well, but lower-rated bonds suffered as COVID-19 cases rose. Investment-grade corporate bond issuance has set records as companies bolster cash balances, while investor demand is improving and yields compared to Treasuries remain higher than historical norms.
- Municipal bond yields were stable relative to Treasuries despite the sell-off in similarly rated corporate bonds. The municipal bond market has been more resilient in recent risk-off (less aggressive) market environments, due to improving new issuance conditions, Fed support and less dire fiscal outlooks. Lower-rated issuers may still struggle with declining revenue, and we favor higher-rated municipal bonds.
- Infrastructure and Utilities traded in line with the broader market last week while Real Estate trailed by 1 percent. In Real Estate, the hotel, retail and office sectors experienced outsized losses, but still have more downside risk. Barry Sternlicht, founder of Starwood Capital, a luxury hotel operator, spoke very negatively about New York office and hotels during a Bloomberg interview, which added to the Real Estate market sell-off.
- Domestic crude production rebounded strongly last week, and inventories increased unexpectedly. Rising production from any of the major suppliers is negative for the crude market right now.
- Commodity-based equities trailed the broader market considerably last week, with crude prices weakening. COVID-19 fears and increased inflationary expectations are a bad combination for commodity-based equities.
- Industrial metals and precious metals rose last week, with copper and gold each up 1.6 percent. Both remain in a bullish trend. Declining interest rates were the primary catalysts for the move. Additionally, the potential for inflation resulting from central bank policies should keep metals prices supported.
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