Week in Review

Equities

Last week the S&P 500® closed above 3,300 for the first time since February 21, and finished the week just 35 points away from the February 19 all-time high. However, breadth (the percentage of stocks in the index trading above their respective 200-day moving averages) was just 57%, compared to 79% on February 19. This indicates recent performance has been driven by fewer names than earlier in the year.

For the first time in history, the price of gold (in dollar terms), crossed above $2,000 per ounce. While the rise in price has coincided with a jump in inflation expectations, the precious metal is lagging the S&P 500 by 18% since its year-to-date low on March 23, confirming our view that the best hedge against inflation expectations is equity exposure. Furthermore, while gold miner stocks have delivered strong performance recently, the VanEck Vectors Gold Miners exchange-traded fund is still down nearly 30% from its all-time high in September 2011.

Fixed Income

The 10-year US Treasury yield was effectively flat last week, as investors await a potential extension of fiscal support. Illustrative of the lower-for-longer yield environment, the yield to maturity on US government bonds is below 1% from the 3-month portion of the curve to 20-year with only the long-bond yielding greater than 1% View Chart 1 on the full report.

US investment grade and high yield credit continued to outperform similar-duration Treasuries, returning ~50 basis points (bps) month to date. The Bloomberg US Corporate Bond Index yield fell to a new all-time low of 1.82% last week, indicating financial conditions remain easy for high-grade issuers, while the yield to worst for high yield is within 30 bps of its all-time closing low.

Emerging market debt outperformed last week on a combination of rate cuts in Brazil and Colombia and the recovery in Argentinian bonds after officials and creditors announced a $65 billion debt restructuring agreement. The pact represents Argentina’s third return from default since 2000.

Table of the Week

Over 120 companies reported last week as earnings season continued its descent. In total, about 85% of the S&P 500 names have now reported second-quarter earnings. The blended earnings growth rate (actual growth rate combined with consensus estimates) is currently -33.8%, a slight improvement from the prior week’s -35.9% estimate. Overall, companies have reported a 22.4% positive earnings surprise relative to June estimates.

The blended earnings growth rate modestly improved from the prior week, led by strong earnings in the Communications Services, Health Care, and Information Technology sectors. The Health Care sector continued its trend of better-than- expected earnings last week as several big names in both the health care providers and pharmaceuticals industries posted positive earnings surprises. Strong sales growth was offset by large pandemic-related headwinds, but earnings still exceeded analyst expectations.

Third-quarter revisions slightly improved from last week, and the consensus for earnings growth for calendar year 2020 is now expected to be -19.5% versus -20% last week. Only 11 S&P 500 names will be reporting this week as earnings season continues to wind down.

View Table of the Week on the full report

Macro Perspective

United States

A mixed batch of labor market data reflected a choppy recovery against a backdrop of discouraging virus data and a series of “fiscal cliffs.” On one hand, the economy added 1.8 million jobs in July (the third consecutive upside surprise), the unemployment rate fell from 11.1% to 10.2%, and initial claims fell for the first time in three weeks View Chart 2 on the full report. On the other hand, only 42% of the jobs lost earlier in the year have been recovered and the ADP National Employment Report® missed expectations by over 1 million jobs. These disparities underscore our view that the US economy faces a bumpy recovery that hinges largely on virus data and additional stimulus.

One week after a variety of unemployment benefits expired, a “Phase Four” fiscal stimulus agreement remains elusive. During this time, unemployment benefits paid out from the Treasury have fallen by 29%. Since unemployed workers tend to have modest savings and a high marginal propensity to consume, additional stimulus is critical to supporting consumer spending and broader economic growth.

International Markets

Reflecting continued improvement in China’s underlying economic activity, the Caixin China General Manufacturing PMI expanded for a third consecutive month, hitting 52.8 View Chart 3 on the full report. This is the highest reading since January 2011. The services component fell more than 4% sequentially, to a reading of 54.1%, led by a large decline in air travel.

This represents the second consecutive decline in the services component, bringing the overall composite down slightly. The MSCI World ex USA Index slightly underperformed the S&P 500’s strong return for the week. The benchmark benefited from a rotation in cyclical names, leading to strong double-digit performance by names in the Industrials, Energy, and Consumer Discretionary sectors. However, this was offset somewhat by declines in large defensive names in the Consumer Staples and Health Care sectors, which comprise a larger weight in the index.

The MSCI Emerging Markets benchmark significantly underperformed the S&P 500. Large gains on the week in the Materials, Energy, and Consumer Discretionary sectors were offset somewhat by only modest gains in large technology-related names and declines in the Utilities, Financials, and Consumer Staples sectors.

Responsible Investing

As part of a $10 billion bond offering, Alphabet Inc. issued $5.75 in sustainability bonds at record-low yields, representing the largest ESG corporate governance bond offering to date. According to the firm’s chief financial officer, the sustainability bonds are intended to fund organizations supporting Black entrepreneurs, small/medium businesses impacted by COVID-19, affordable housing, clean energy projects, and green buildings.

The Week Ahead

This week we expect the NFIB Small Business Optimism Index, Retail Sales, Consumer Sentiment, the ZEW Survey Expectations, and a winding down of the US earnings season.