Marco Fragnito, Managing Principal | Robert R. Fragnito, Chief Operating Officer
- Economic data continues to present positive outlook on recovery.
- COVID-19 hotspots continue to draw concerns over second national lockdown.
- The Fed debates Yield Curve Control.
Equity markets continued their upward rise in June, with the S&P 500 having its best quarterly performance since 1998. The Nasdaq Composite rose for the first time above 10,000, rising 6% for the month of June. The S&P 500 and the Dow Jones Industrial gained respectively 1.8% and 1.7%, with all indexes rising for three consecutive months.
The driving factors for the market gains; better economic data which include strong job gains, a record setting rise in retail sales, better manufacturing surveys and rising consumer confidence. In combination with continued monetary and fiscal stimulus has led to a historic rally over a noticeably short time period.
Weighing on equity markets were a very downbeat economic outlook from the Federal Reserve, delivered during Chairman Jerome Powell’s semi-annual congressional testimony. A resurgence of the COVID-19 infections further dampened the mood as new hotspots have appeared in states like Florida, Texas, Arizona and California. The data appears less than clear as to whether we are headed for another country wide shut down. Also causing further volatility is rhetoric coming from the White House bringing into question the US and China’s commitment to the trade deal signed in January of this year.
It appears to us that equity markets have discounted in large part any trade deal being completed in the near or short term. With all the negatives, partly offset by the economic data, markets continue to “climb the wall of worry” as they say, and we remain comfortable focusing on the data rather than following emotions or any biases.
In June, the economic data proved extraordinarily strong, in some cases setting records for the gains. The monthly jobs report showed a gain of 2.5 million versus expectations of job losses of over 7 million. Retail sales for the month of May rose a record 17.7% versus expectations for an 8.1% gain. While the Institute of Supply Management’s (ISM) measure of manufacturing activity also showed improvement for the first time in four months, with regional measure also rising more than expected.
US Treasury interest rates settled largely unchanged after rising for most of June on rumors of the Federal Reserve considering Yield Curve Control. In brief, Yield Curve Control would see the Federal Reserve purchase an unlimited number of long-term bonds to hold down long-term interest rates at a preset level. This approach was used post World War II to help the economy continue its recovery started during the war. This strategy may hold the risk of rising inflation in the long-term, confirmed with gold rising to an 8-year high and approaching all-time highs.
With continued improved economic data, exceptionally low interest rates and the promise of more fiscal and monetary stimulus, we expect markets to continue to rally. We would not be at all surprised if in the coming months we see all major indexes regain their old highs. The talk of the Federal Reserve instituting a Yield Curve Control program would lead to a rise in equity markets lasting several years.
The last time we saw the Fed unleash this program equity markets rose for the next 14 years, from 1942 to 1951. Such a program would also dramatically reduce risks to fixed income investors as both short- and long-term rates would essentially remain fixed. Time will tell if the Fed will act, in the meantime we continue to remain positive on equity markets while managing excesses in certain sectors by reducing exposure in those areas.
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The opinions expressed here reflect the judgement of the author(s) as of this date and are subject to change without notice. Information presented here is for informational purposes only and does not intend to make an offer, solicitation, or recommendation for the sale or purchase of any product, security, or investment strategy. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here. The information being provided is strictly as a courtesy.
Wells Fargo Advisors, Angela Shin, “Monthly Market Commentary,” July 1, 2020. ZeroHedge, Tyler Durden, “Here Comes Yield Curve Control: The Fed Is About To Unleash A Mindblowing Stock Rally,” June 22, 2020. Reuters, Howard Schneider, “Fed mulls promises for the future, appears to discount yield curve control,” June 1, 2020. Investopedia, Mark Kolakowski, “What is Yield Curve Control?” February 24, 2020.