10-15 Associates

The Good, The Bad and The Ugly

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The month of July was a bit turbulent, with mixed headlines and renewed fears of the virus. When it was all over, markets tacked on more gains.  The Dow was up 2.38% for the month, the S&P 500 gained 5.51%, and the Nasdaq charged higher, gaining another 6.825%. Gains were not exclusive to stocks as yields plummeted, taking 10 Year Treasury lower, declining a total of 19.49% for the month and pushing bond prices higher once again.

Stocks continued their march higher in July, adding a fourth consecutive monthly gain. Despite renewed COVID-19 concerns, rising tensions with China, and signs of a stalling economic recovery, the S&P 500 Index returned to positive territory for the year. It was helped by big gains from a handful of mega cap dividend bearing stocks that were bolstered by generally better than-expected corporate results. To quantify that, nearly 72% of companies on the S&P 500 have exceeded earnings estimates.

Strong advances in Chinese equities of 1.62% helped emerging markets’ equities outperform the U.S., while foreign developed market equities trailed despite a weakened U.S. dollar. Although the emerging markets are still negative on the year, July saw a sharp reversal with an increase of over 8%.  This would also point to the rally in some commodities markets, with gold reaching new highs and outperforming even technology so far in 2020.

The consumer discretionary and utilities sectors led the market higher, with gains of 8.92% and 7.72% respectively. The more cyclical energy and financial sectors underperformed. Energy, the only losing sector for the month despite higher oil prices, posted a loss of -5.35%. Financials posted gains of 3.52% but are still down over 20% for the year.  Growth has outperformed value every month this year, but large-cap companies regained leadership over small-cap after trailing for the past three months.

On the bond side, we saw fixed income assets continue to rally in the month of July, with both short-term yields and long-term yields falling. The decline in the two year on a year to date basis is 93.28%, and a drop of almost 30% for the 10-year yield for the year.

10 Year Treasury yields closed the month at 0.55%, matching the lows of March and even hitting an all-time low of 0.52% in afterhours trading. The Fed left its policies unchanged at the July meeting. They also announced that they intended to extend their full menu of lending programs to businesses, governments, and individuals through the end of 2020. This maintained the Fed’s dovish stance and reinforced their commitment to supportive monetary policy. This was interpreted as positive news to the economy and therefore positive news to financial markets.

High yield or riskier fixed income positions even performed well this month, increasing by 0.49% and turning positive for the year. The move in this sector demonstrates investors’ willingness to take on more risk even in their bond portfolios, knowing they have the continued support of the Fed for the balance of the year.

Overall, financial market returns so far in 2020 could be characterized as good, despite the fact that the broad economic indicators would be better described as bad, and COVID 19 is in no uncertain terms, ugly. Real gross domestic product (GDP), decreased at an annual rate of 32.9% in the second quarter of 2020.  The decline in second quarter GDP reflected the response to COVID-19, as “stay-at-home” orders issued in March and April were partially lifted in some areas of the country in May and June, as well as government pandemic assistance payments being  distributed to households and businesses.  Markets shrugged off the news of record high new cases in several areas and the imposition of border closings in some states. The economy is also weathering the brunt of the 66,000 small businesses that have closed since March. Jobless claims have topped 1 million every week for the past twenty weeks, weighing on Congress to pass yet another round of stimulus.

All in all, there was a lot to digest this month, but the main takeaways are that investors are showing no lack of appetite for risk, and the need for income continues to drive traditionally lower risk assets such as dividend paying stocks and bonds higher, resulting in lower Treasury yields and higher stock prices.

We will remain diligent in focusing on what is moving the markets, but as always, stay safe and welcome in our final full month of summer.

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