July 27, 2020

Weekly Market Commentary July 23rd to July 27th 2020

The spotlight this week shone brightly on one major release: second quarter Gross Domestic Product (GDP). GDP is the annualized quarterly measurement showing whether our economy is expanding or contracting. The sweet spot for the US economy is between 2-4%. Q2 was expected to be the worst release ever recorded as the bulk of the time period was when the economy was in full shutdown mode and it did not disappoint. As bad as it was, it still managed to beat consensus. Expectations were for a -34.6% but the actual figure was -32.9%. To put this abysmal number into perspective, it’s far more visually striking when you see it in a chart. Here is the US GDP since 1947:

As you can see, even in the Great Recession of 2008-2009, GDP never hit double digit losses. Second quarter 2020 is well over three times worse. These are truly unprecedented times yet optimism holds as the terms “bounce back” and “V-shaped recovery” are frequently used with respect to Q3 and Q4 expectations.

In other economic news this week, Durable Goods and Capital Goods Orders both came in better than expected. The Federal Open Market Committee (“The Fed”) met and left rates and policy unchanged. Economists were looking for more forward guidance; that is, what is the Fed’s plan moving forward if that V-shaped recovery takes longer than anticipated? Instead, we got a pledge that they will continue to use all tools necessary to ultimately reach its goal of low unemployment and stable inflation.

Speaking of unemployment, the second most concerning statistic of the week was the uptick in Weekly Jobless Claims. The 1.434 million new applicants for unemployment assistance figure was up from the prior week and is the second week in a row with an increase. This is likely indicating more business are re-shutting as the COVID-19 virus keeps flaring up regionally.

Lastly, Personal Income and Consumer Spending both matched expectations; Core PCE (personal consumption expenditures) inflation came in at 0.9%, well short of the Fed’s 2% target; and both Conference Board consumer confidence and University of Michigan Sentiment Index came in below consensus.

Stocks were mixed on the week with NASDAQ leading the way at +3.7% thanks to strong earnings results in the tech sector. The S&P 500 Index was up +1.7%. Yields continued to fall during the week with the bellwether 10-Year U.S Treasury lower by five basis points to 0.54%, testing all-time lows.

Key economic releases for next week include ISM and Markit Manufacturing and Services indices; Weekly Jobless Claims; and the July employment report.