Market Commentary – July 2020

Stocks posted gains in July in spite of gloomy news on the economic and pandemic fronts. Investors continued to trust equities despite the gross domestic product falling nearly 33.0% in the second quarter, mixed quarterly corporate earnings results, emerging pandemic hot spots, growing unemployment claims, and ongoing turmoil between the United States and China. On the positive side, 4.8 million new jobs were added in June, the housing sector surged, and industrial production continued to rebound. Investors also may be hoping that more financial stimulus is in the offing. Energy stocks, which had plunged in May, rebounded in June and continued to keep pace in July.

The COVID-19 pandemic continues to dominate nearly every aspect of life. Some states are seeing the number of reported cases soar and have considered (and, in a few cases, enacted) partial lockdowns. Throughout July, several companies made announcements of progress toward either treatment or a vaccine. States and local communities struggle with plans to get students back to school. Through it all, investors stayed with stocks, pushing them to their fourth consecutive month-over-month gain. The big winners in July were the Nasdaq and the S&P 500. The Global Dow advanced 3.5%, followed by the Russell 2000 and the Dow. Year to date, the Nasdaq and the S&P 500 are ahead of their respective 2019 closing values. The next closest is the Dow, which remains more than 7.0% behind last year's pace.

By the close of trading on July 31st, the price of crude oil rose to $40.41 per barrel, slightly ahead of its June 30th price of $39.35 per barrel. The price of gold soared, climbing to $1,989.90 by close of business on July 31st, up from its June closing price of $1,798.80.

*Chart reflects price changes, not total return

Last Month's Economic News

• Employment increased by 4.8 million in June after adding 2.5 million jobs in May. Notable job gains occurred in leisure and hospitality, education and health services, retail trade, manufacturing, and professional and business services. The unemployment rate dropped 2.2 percentage points to 11.1% for the month as the number of unemployed persons dropped by 3.2 million to 17.8 million. Although unemployment fell in May and June, the jobless rate and the number of unemployed are up by 7.6 percentage points and 12.0 million, respectively, since February. In June, average hourly earnings fell for the second consecutive month, decreasing by $0.35 to $29.37, primarily due to job gains among lower-paid workers. Average hourly earnings increased by 5.0% over the last 12 months ended in June. The labor participation rate for June increased 0.7 percentage point to 61.5%.
• The Federal Open Market Committee held its regularly scheduled meeting at the end of July and unanimously voted to hold the target range for the federal funds rate at its current 0.00%-0.25%. Although the FOMC noted that economic activity and employment have picked up somewhat in recent months, they remain well below their levels at the beginning of the year. It was also noted that the ongoing public health crisis caused by the COVID-19 pandemic will weigh heavily on economic activity, employment, and inflation in the near term. The FOMC expects to maintain this rate until it is confident the economy has weathered the recent events. The FOMC isn't scheduled to meet again until September.
• According to the advance estimate for the second-quarter gross domestic product, the economy decelerated at an annualized rate of 32.9%. The GDP decreased 5.0% in the first quarter. Stay-at-home orders issued in March and April in response to the COVID-19 pandemic greatly impacted the economy. Consumer spending was a big drag, falling 34.6%, reeling from the initial effects of the COVID-19 pandemic. Fixed investment fell 29.9% in the second quarter (-1.4% in the first quarter), and nonresidential fixed investment dropped 27.0% in the second quarter, compared to a 6.4% decline in the prior quarter. Exports were down 64.1%, and imports sank 53.74%. Nondefense government expenditures increased 39.7% due to stimulus spending programs initiated in response to the pandemic.
• The Treasury budget deficit may have come in smaller than expected in May, but it surged in June. The deficit was $864.1 billion, exceeding the June 2019 budget deficit by nearly $855 billion. Government spending reached $1.1 trillion in June. Through the first nine months of fiscal 2020, the deficit is $2.74 trillion. Over the same period for the previous fiscal year, the budget deficit was $744.1 billion.
• According to the Personal Income and Outlays report for June, personal income and disposable (after-tax) personal income fell 1.1% and 1.4%, respectively. This followed May's decreases of 4.4% (personal income) and 5.1% (disposable personal income). The decrease in personal income last month is largely attributable to a reduction in federal government payments from recovery programs initiated due to the pandemic. Consumers ramped up their spending in June, as personal consumption expenditures increased 5.6% after climbing 8.5% in May. Inflation remains muted as prices for consumer goods and services rose a scant 0.8% in June after creeping ahead 0.1% the previous month. For the past 12 months, consumer prices are up a mere 0.8%.
• Following three consecutive monthly declines, consumer prices rose 0.6% in June, according to the Consumer Price Index. Year to date, consumer prices are up 0.6%. Gasoline prices surged in June, climbing 12.3%. Excluding food and energy, consumer prices increased 0.2% for June and 1.2% over the last 12 months. Prices that producers receive for goods and services declined 0.2% in June after climbing 0.4% in May. Year to date, producer prices are down 0.8%. In June, the decrease in overall producer prices was driven by a 0.3% decline in prices for services. Producer prices for goods rose 0.2%.
• The housing sector posted strong sales numbers in June. Sales of existing homes jumped 20.7% last month after plunging in May and April. Over the 12 months ended in June, existing home sales are down 11.3% (-26.6% for the 12 months ended in May). The median existing-home price in June was $295,300 ($284,600 in May). Unsold inventory of existing homes represents a 4.0-month supply at the current sales pace, down from 4.8 months in May. Sales of existing single-family homes vaulted 19.9% in June over the previous month, but are off 9.9% from a year ago. After climbing 16.6% in May, sales of new single-family homes surged again in June, increasing 13.8% for the month. The median sales price of new houses sold in June was $329,200 ($317,900 in May). The average sales price was $384,700 ($368,800 in May). June's inventory of new single-family homes for sale represents a supply of 4.7 months at the current sales pace.
• Total industrial production rose 5.4% in June after increasing 1.4% in May; even so, it remained 10.9% below its pre-pandemic February level. For the second quarter as a whole, the index fell at an annual rate of 42.6%, its largest quarterly decrease since the industrial sector retrenched after World War II. Manufacturing output climbed 7.2% in June, as all major industries posted increases. Total industrial production was 10.8% lower in June than it was a year earlier.
• New orders for durable goods followed May's 15.1% increase by climbing 7.3% in June. Transportation equipment, up for two consecutive months, again drove the June increase, surging ahead by 20.0%. Excluding transportation, new orders increased 3.3%. Excluding defense, new orders increased 9.2%.
• The Conference Board Consumer Confidence Index® decreased in July after increasing in June. The index stands at 92.6, down from 98.3 in June. The Present Situation Index — based on consumers' assessment of current business and labor market conditions — improved from 86.7 to 94.2. However, the Expectations Index, which is based on consumers' short-term outlook for income, business, and labor market conditions, decreased from 106.1 in June to 91.5 last month.

International

• After much haggling, European Union leaders agreed to a historic $858 billion recovery fund to help rebuild EU economies decimated by the pandemic. The stimulus is much needed, particularly after eurozone gross domestic product fell 40.3% in the second quarter, pushing Europe into recession territory. British stocks fell in July as the FTSE 100 Index lost roughly 3.0%. The Hang Seng Index declined nearly 1.7% for the month. China's gross domestic product rebounded from the initial impact of the COVID-19 virus, expanding 11.5% in the second quarter after falling 9.8% in the first quarter.

June's economic data was a mixed bag. Nearly 5 million jobs were added to the labor force, the housing sector picked up steam, and industrial production rose. On the other hand, the federal budget deficit neared $900 billion, the international trade deficit increased, and producer prices sank. As more data for July is released, it will likely offer a mixed bag of good and bad as the economy slowly pushes toward recovery. Entering August, most eyes will focus on Congress and the president as they try to hammer out another financial stimulus package.