Market Commentary – August 2020
The positive run for stocks continued in August as the major market indexes regularly reached all-time highs. While investors remained bullish toward equities, it wasn't always clear why. Although the economy is gradually picking up steam, it has more to go to reach its pre-pandemic level. Gross domestic product for the second quarter showed that the economy receded at an annual rate of 31.7%. Job growth is ongoing, yet more than 14 million people are receiving unemployment benefits. Personal income inched ahead by 0.4%, but consumer spending rose by 1.9%. Inflation remained well below the Federal Reserve's target of 2.0%, keeping prices for consumer goods and services down. Interest rates for loans and mortgages remain low helping the housing sector to surge.
The Federal Reserve has maintained accommodative measures to help spur the economy, yet additional stimulus relief from the federal government has reached a stalemate. Globally, tensions between the United States and China have risen, potentially putting the phase-one trade deal between the economic giants in jeopardy. The COVID-19 pandemic continues to dominate nearly every aspect of life. States are struggling to settle on appropriate protocols for reopening schools. Testing for the virus has increased, and the numbers of COVID-related infections and deaths continue to mount. Throughout August, news of improved virus treatments and possible vaccines offered encouragement.
By the end of the month, each of the benchmark indexes listed here scored sizable gains, leading to the best August in decades. The technology sector continued to flourish last month, leading the Nasdaq to record highs. The Dow closed the month up 7.6%, followed by the S&P 500, the Global Dow, and the Russell 2000. Year to date, the Nasdaq is 31.2% ahead of last year's pace, followed by the S&P 500, which is up 8.3%. The Dow is nearly at its 2019 closing value, while the Global Dow and the Russell 2000 continued to gain ground.
|Market/Index*||2019 Close||Prior Month||As of August 31 st||Monthly Change||YTD Change|
|S & P 500||3,230.78||3,271.12||3,500.31||7.01%||8.34%|
|Federal Funds||1.50% – 1.75%||0.00% – 0.25%||0.00% – 0.25%||0 bps||-150 bps|
|10-yr Treasury||1.91%||0.53%||0.69%||16 bps||-122 bps|
*Chart reflects price changes, not total return
Last Month's Economic News
- The US labor market continued to regain ground in July, though at a slower pace, indicating the economic rebound is still making headway despite a surge in coronavirus infections. Payrolls increased by 1.76 million in July, beating estimates for a 1.48 million gain and after a 4.79 million advance in June. The unemployment rate fell by more than expected, to 10.2%, while a broader gauge of joblessness also declined to 16.5%. Employment remains about 14 million below the pre-pandemic level in February, when the recession officially started, the July numbers show. Adjusted for the misclassification of unemployed Americans as employed – an issue that’s plagued the data to varying degrees since March – the jobless rate would have been about one percentage point higher.
- Claims for unemployment insurance mostly leveled off in August. According to the latest weekly totals, as of August 15th, there were nearly 14.5 million workers still receiving unemployment insurance. The insured unemployment rate was 9.9% (11.6% as of July 18). The highest insured unemployment rates in the week ended August 8 were in Hawaii (19.8%), Puerto Rico (19.2%), Nevada (17.3%), California (16.1%), New York (15.4%), Connecticut (13.6%), Louisiana (13.5%), the Virgin Islands (12.8%), Georgia (12.6%), and Massachusetts (12.2%). During the week ended August 8th, 49 states reported 10,972,770 individuals claiming Pandemic Unemployment Assistance benefits and 49 states reported 1,407,802 individuals claiming Pandemic Emergency Unemployment Compensation benefits.
- According to the second estimate for second-quarter gross domestic product, the economy decelerated at an annualized rate of 31.7%. 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 34.1%, reeling from the initial effects of the pandemic. Fixed investment fell 28.9% in the second quarter (-1.4% in the first quarter), and nonresidential fixed investment dropped 26.0% in the second quarter, compared to a 6.7% decline in the prior quarter. Exports were down 63.2%, and imports sank 54.0%. Nondefense government expenditures increased 40.1% due to stimulus spending programs initiated in response to the pandemic.
- The rebound in US retail sales slowed in July by more than expected, indicating a surge in coronavirus cases and still-high unemployment cooled the economic recovery. The value of retail purchases increased 1.2% from the prior month after an upwardly revised 8.4% gain in June. Even so, it was the third straight gain and the total value of retail sales is now above the pre-pandemic levels, with July purchases also up 2.7% from a year earlier. That indicates one major part of the economy has returned to near its previous trend, though the mix of spending now is more concentrated in categories like online sales and groceries, while restaurants and apparel stores remain well below typical levels. The extra $600 in weekly jobless benefits that have propped up incomes and spending for millions of unemployed people in recent months expired at the end of July, and lawmakers have been in a stalemate over another aid package.
- 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 year 2020, the deficit is $2.74 trillion. Over the same period in the previous fiscal year, the budget deficit was $744.1 billion.
- After climbing 13.8% in June, sales of new single-family homes surged again in July, increasing 13.9% for the month. The median sales price of new houses sold in July was $330,600 ($329,200 in June). The average sales price was $391,300 ($384,700 in June). July's inventory of new single-family homes for sale represents a supply of 4.0 months at the current sales pace, down from June's estimate of 4.7 months.
- US industrial production increased for a third straight month in July, indicating manufacturing is gradually emerging from a deep slump tied to the coronavirus pandemic. Total output at factories, mines and utilities rose 3.0% from the prior month after a revised 5.7% gain in June that was the biggest since 1959. Factory output climbed 3.4% last month while manufacturing capacity utilization increased to 69.2%. Despite another solid advance in production, the Fed’s index of industrial output is still down 8.3% from February, before the pandemic prompted lockdowns of businesses and sent the economy into a tailspin.
- The rebound in US consumer spending moderated in July amid a surge in virus cases, with outlays at risk of further softening after cuts in supplemental relief payments for jobless Americans. Household outlays rose 1.9% from the prior month following an upwardly revised 6.2% in the prior month. That compared with economists’ estimates for a 1.6% gain. Personal incomes rose 0.4%, topping expectations for a slight decline. The deceleration in spending, which accounts for about two-thirds of the economy, marks a tempering in the economic recovery following two months of stronger gains. While spending increased in recent months, total outlays remain below pre-pandemic levels.
- The Conference Board Consumer Confidence Index® decreased in August after declining in July. The index stands at 84.8, down from 91.7 in July. The Present Situation Index, based on consumers' assessment of current business and labor market conditions, decreased sharply from 95.9 to 84.2. The Expectations Index, which is based on consumers' short-term outlook for income, business, and labor market conditions, declined from 88.9 in July to 85.2 in August.
- Shinzo Abe, Japanese Prime Minister since 2012, announced that he will resign due to poor health. A new leader is expected to be chosen by the Liberal Democratic Party, of which Abe was the leader, and approved by parliament until national elections are held in October of 2021. The Nikkei fell following Abe's announcement. Elsewhere, Andrew Bailey, Bank of England Governor, pronounced more stimulus is available, if needed, to support the U.K. economy. German bond prices plunged, sending yields to their highest level since early June, a sign that inflation and interest rates will remain low. In China, industrial production fell in July, although it remains 4.8% ahead of last year's pace.
Most economic indicators in July were positive as the economy continued to reopen. However, the pandemic still rages and new issues may develop as schools reopen. The trade dilemma with China will likely continue to impact the economies of both countries. New developments in the treatment of the pandemic should bring hope that the end is in sight and spur further economic growth.
The information and opinions in this report were prepared by the ANB Financial Services Division of ANB Bank. Information and opinions have been obtained or derived from sources we consider reliable, but we cannot guarantee their accuracy or completeness. Opinions represent ANB Financial Services opinion as of the date of this article and are for general information purposes only. ANB Financial Services does not undertake to advise you of any change in its opinions or the information contained in this article. Past performance does not indicate future results. The value or income associated may fluctuate. There is always potential for loss, as well as gain. Trust and Investment Services are not insured by the FDIC, Not a deposit or other obligation of, or guaranteed by, the depository institution subject to investment risks, including possible loss of the principal amount invested.