U.S. Cases Surpass 3 Million, Cramping Reopening; Stocks Have a Volatile Week

Key takeaways

• As of July 10, 2020, there were more than 3.1 million cases and over 133,000 deaths in the United States. Worldwide, there have been more than 12.2 million cases and over 555,000 deaths. (Johns Hopkins University)
• A record high 60,000+ new COVID-19 cases were reported on Wednesday, July 8 and Thursday, July 9. The reported cases rose +14.5% week over week. (Johns Hopkins University)
• Seven states are experiencing an active or imminent outbreak of COVID-19. Twenty-four states are at risk of an outbreak, while only two states are on track to contain the virus. (Covid Act Now)
• Second quarter earnings are estimated to drop -44% for companies in the S&P 500. This is far worse than the -11.7% decline that was originally forecast at the onset of the quarter. (Wall Street Journal, Refinitiv)
• New first-time jobless benefit claims were 1.314 million last week. They fell by almost 100,000, the biggest decline in a month. And, continuing jobless claims fell by 698,000 to 18.06 million, the lowest level since April 17, 2020. However, underemployment (U-6) stands at 18%, above the highs from 2009.
• The top 10 companies by market cap in the S&P 500 have returned +9.6% year-to-date and have a price-to-earnings ratio of 31.4. This proves that although the largest companies by market cap are the most expensive, they are providing investors with the highest returns. (Wall Street Journal)
• Consumer sentiment declined to 42.9 last week, its first decline since early May on concerns of additional outbreaks. (Bloomberg)
• Florida’s Walt Disney World reopened on Saturday, July 11, 2020, and while face coverings are required, there is nothing in the rules about screaming. (Wall Street Journal)

Stocks have volatile week as drama in D.C. continues

Source: MarketWatch

Trends to watch: Emerging markets are making a strong run

The MSCI Emerging Markets (EM) Index is +15.6% since May 28, well ahead of the S&P 500 Index (+4.6%) and the developed international MSCI EAFE Index is +4.2% for that same period. China’s latest rally has driven more than 60% of EM’s gains, supported by China’s relatively stronger economic growth outlook and successful virus containment efforts.

Emerging markets’ relative strength is supported by earnings. As second quarter earnings season approaches, U.S. and EM earnings estimates continue to hold up relatively better than developed international. EM earnings are expected to fall by 13% in 2020, less than half the 29% decline expected in developed international markets, supporting LPL Financial’s preference for emerging markets over developed international stocks. (LPL Financial, FactSet)

1. Market update

• Markets were volatile this week. The S&P 500 was +1.76%, the Nasdaq was +4.01%, and the Dow Jones was +0.96%.
• Market breadth has not been great recently. Currently only 42% of S&P 500 companies are above the 200-day moving average. (Wall Street Journal)
• The top 10 companies by market cap in the S&P 500 have returned +9.6% year-to-date and have a price-to-earnings ratio of 31.4. This proves that although the largest companies by market cap are the most expensive, they are providing investors with the highest returns. (Wall Street Journal)
• The Nasdaq 100 has outperformed the S&P 500 by over 30% over the past 12 months, with most of the divergence taking place this year. (Wall Street Journal)
• There were over 300 hedge fund closures in the first quarter of 2020. This is the highest number of liquidations since 2015. (Wall Street Journal)
• The Bloomberg Barclays Aggregate Bond Index returned +2.9% in the second quarter, its eighth consecutive quarter of gains and best two-year number since 2010. Economically sensitive bond sectors led, but most are still in negative territory year-to-date. (LPL Financial)
• More economically sensitive bond sectors (high-yield corporates, bank loans, emerging market debt) led in the second quarter of 2020, but even Treasuries advanced and investment-grade corporate bonds held their own, nearly keeping up with high-yield corporates, as the Federal Reserve added the sector to its bond purchase program. (LPL Financial)
• Second-quarter earnings are estimated to drop -44%for companies in the S&P 500. This is far worse than the -11.7% decline that was originally forecasted at the onset of the quarter. (Wall Street Journal, Refinitiv)
• Many companies slashed dividends this year. The net change in dividends was more than $40 billion, the most since 2009. (Wall Street Journal)
• Gold climbed above $1,800 per ounce last week for the first time since 2011. This is likely due to concerns over rising COVID-19 cases and an economic slowdown.

2. COVID-19 summary

Figure 1: Daily New Cases in the U.S. as of July 10

Source: Worldometers&v=uetg5xofizxdjd0itxszoajm

• As of July 10, 2020, there were more than 3.1 million cases and over 133,000 deaths in the United States. Worldwide, there have been more than 12.2 million cases and over 555,000 deaths. (Johns Hopkins University)
• A record high 60,000+ new COVID-19 cases were reported on Wednesday, July 8 and Thursday, July 9. The reported cases rose +14.5% week over week. (Johns Hopkins University)
• The federal government will pay the drug maker Novavax $1.6 billion to develop a successful vaccine and produce 100 million doses by early 2021. It’s a big bet on a company that has never brought a product to market. (New York Times)
• Florida’s Walt Disney World reopened on Saturday, July 11,and while face coverings are required, there is nothing in the rules about screaming. (Wall Street Journal)
• The Trump administration has officially tendered the required one-year notice for the U.S. to withdraw funding membership with the World Health Organization (WHO). The notice cited “WHO’s undue deference to China” and failure to provide timely and accurate information about the coronavirus. (Cetera Investment Management)
• Seven states are experiencing an active or imminent outbreak of COVID-19. Twenty-four states are at risk of an outbreak, while only two states are on track to contain the virus. (Covid Act Now)

Figure 2: States With Outbreaks and at Risk as of July 9

Source: Covid Act Now&v=uetg5xofizxdjd0itxszoajm

3. What is going on in the U.S. economy right now?

The nation’s fledgling economic recovery is losing momentum as a new wave of coronavirus infections causes businesses to scale back in several big states and consumers retreat anew.

The new economic disruptions are concentrated in the three most populous states—California, Texas, Florida—plus Arizona. All have seen a rise in infections and hospitalizations in recent weeks. Together, these four states make up about 30% of all U.S. economic output, according to Moody’s Analytics and the Wall Street Journal.

• The ISM Non-Manufacturing (services activity) Index for June jumped by +11.7 points to 57.1 to rebound back into expansion after two months of contraction.The sharp rebound is the largest single monthly increase on ISM’s record books. (Cetera Investment Management)
• The CBO is forecasting a big rebound for economic output in the second half of 2020. Many economists believe the economy is growing again after a sharp contraction in the spring caused by the pandemic. (Wall Street Journal)
• The U.S. budget deficit totaled $863 billion in June, nearly as much as the entire gap for the 2019 fiscal year, according to the Congressional Budget Office (CBO).
• Mortgage applications activity increased by a seasonally adjusted +2.2% last week, following a -1.8% decline the week prior. The two contributing indexes for refinance and new purchase activity rose by +0.4% and +5.0%, respectively. The average 30-year fixed mortgage rates declined to another record low of just 3.26%. (Cetera Investment Management)
• U.S. E-commerce as a percent of retail sales is 25%. As a result of widespread lockdowns, consumers have shifted a significant portion of their spending online. (U.S. Department of Commerce)
• Consumer sentiment declined to 42.9 last week, its first decline since early May on concerns of additional outbreaks. (Bloomberg)

4. Unemployment

• New first-time jobless benefit claims were 1.314 million last week. They fell by almost 100,000, the biggest decline in a month. And, continuing jobless claims fell by 698,000 to 18.06 million, the lowest level since April 17, 2020. However, underemployment (U-6) stands at 18%, above the highs from 2009.
• Although new filings for unemployment claims have fallen 14 straight weeks from a peak near 7 million in late March, the gradual decline in recent weeks and still very high number of unemployed point to a long road ahead for the U.S. job market to fully recover. (U.S. Bureau of Labor Statistics)
• We now have nearly 36 million workers who are either on or have recently applied for unemployment benefits. That is about 23% of the U.S. civilian workforce. Pandemic Unemployment Assistance (PUA) filings started climbing again as the pandemic worsened in a number of states. (Wall Street Journal)
• According to the Atlanta Federal Reserve, “the typical firm in our panel does not expect to regain their pre-Covid levels until sometime after the end of 2021.” (Duke University, Atlanta Fed)
• United Airlines said it is exploring the possibility of shedding almost half of its U.S. workforce. The U.S. airline industry is facing its biggest shake-up in a generation as executives expect a recovery in the demand to take years. (Wall Street Journal)

5. The economy around the globe

• The eurozone economy will fall into a deeper recession this year than initially thought, and the recovery in 2021 will be less robust, according to an updated economic forecast released by the European Commission on Tuesday, July 7, 2020.
• For the 27 countries that comprise the EU, a downturn of -8.3% is expected (versus -7.4% previously forecast in May) in 2020, before growing by 5.8% (versus +6.1% forecast in May) in 2021.
• Officials cited a more gradual pace of lifting COVID-19 lockdown measures than previously assumed. (Cetera Investment Management, Deutsche Welle)

6. Bullish thinking

• David Lebovitz, Global Market Strategist for JPMorgan, believes that investors should be “embracing less traditional equity and fixed income strategies, thinking about things like option overlays on your portfolio and also maybe looking in parts [of the market] where you haven’t looked all that much before.” That includes “core real assets and, specifically, direct real estate and unlisted infrastructure are really interesting ways of generating income in your portfolio without materially adding to your overall volatility.” (JPMorgan)
• LPL Financial continues to favor mortgage-backed securities for their combination of reasonable income, solid relative valuations, and resilience if rates rise.

7. Bearish thinking

• Dr. David Kelly of JPMorgan believes the recovery is going to be very slow. He said that the risk for investors is that “they buy too much into the idea of a full V-shaped recovery in the economy and don’t recognize” that we are “entering the back roads of the economy and they’re slower and they’re bumpier. You need to position a portfolio…recognizing we’re eventually going to get there—we will eventually have a vaccine and we’ll get past all this—but do recognize there’s also going to be a slower going from here.” (JPMorgan)
• Nouriel Roubini, Professor of Economics at NYU, believes that we are nearing something like the Great Depression.He said in an interview, “I’ve always said that my prediction for a ‘Greater Depression’ is not about 2020, but the decade of the 2020s, sometime by the middle of the decade.” (Yahoo Finance)
• The S&P 500 was down -4% the first six months of the year in 2020. Historically, when stocks were lower in the first half of the year, they were higher the rest of the year only 52% of the time—and up only +1.2% on average. Numbers are much stronger when stocks are higher to start the year. (LPL Financial)
• Longtime economist Gary Shilling thinks that “we’ve got a second leg down and that’s very much reminiscent of what happened in the 1930s where people appreciate the depth of this recession and the disruption and how long it’s going to take to recover. “Stocks are [behaving] very much like that rebound in 1929 where there is absolute conviction that the virus will be under control and that massive monetary and fiscal stimuli will reinvigorate the economy,” he said, adding that the market could drop as much as 40% over the next year.(CNBC)
• Burt White, CIO of LPL Financial, said that “fixed income has had a great run, whether you look back two years or 20. But the road may get tougher going forward. LPL Financial expects gains to be limited for core bonds over the rest of the year and into 2021, and “finding good sources of income while managing risk is probably going to get more challenging.”