Thursday, 24 September 2020

Major equity markets were broadly lower this week as vaccine optimism was heavily outweighed by political turmoil, weak prospects for an additional fiscal stimulus bill, and rising coronavirus cases around the globe. 


The S&P 500 briefly entered correction territory as the index was down over 10% from the September 2nd peak during intraday trading on Thursday, though rallied back to end the day slightly positive and finished the week down 3.3%. While the initial pullback from the peak was driven by technology and consumer discretionary stocks, those same sectors fared the best this week down just shy of 2% each. Health care stocks had modest returns, boosted by Johnson & Johnson which became the fourth drug maker to enter late-stage trials for a vaccine for the coronavirus. The disparity between value and growth stocks expanded once again, currently at roughly 33% as faded hopes of a stimulus bill gave rise to concerns of a faltering recovery, with the value-leaning financial sector taking an additional hit on reports of money laundering through some global firms. Abroad, European stocks also took a beating due to an acceleration in coronavirus cases, with the United Kingdom and France taking steps to increase restrictions. The MSCI Emerging Markets returned -2.6% this week, in part due to coronavirus concerns but also due to a strengthening dollar. This week’s return shifts the index to negative for the year. 


Fixed income markets were relatively calm this week despite the selloff in equities. $52 billion in 2-year U.S. Treasury notes were auctioned this week, priced at a yield of 0.14%. The yield on the 2-year note fell another 1 basis point to 0.13% on Thursday, and the yield on the benchmark 10-year U.S. Treasury note fell 3 basis points to 0.66%. Bond yields fall as prices rise. 


On the heels of last week’s FOMC meeting, Fed Chairman Jerome Powell testified in front of the House Financial Services Committee in regards to Coronavirus Aid, Relief and Economic Securities (CARES) Act and the ongoing recovery in the U.S. Powell described how the economy has improved since the second quarter, with various sectors showing particular resilience such as in housing. He once again called for additional fiscal stimulus, and that the path of the economy is largely dependent on the path of the coronavirus. Reiterating similar comments the Chairman had previously made, Powell stated that the Fed remains “committed to using [its] full range of tools to support the economy for as long as is needed.” Helping to support the Fed Chair were readings from August for the housing sector, with existing home sales coming in better than expected at 6 million, up 10.5% year-over-year. New home sales also beat estimates at just over 1 million, with house prices as measured by the FHFA House Price Index rising 6.5% from a year ago. Initial jobless claims were weaker than anticipated for the week at 880,000, up 20,000 from the prior week. Unemployment claims, however, managed to fall once again to 12.6 million.

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