Stock markets around the world suffered their worst weekly losses since mid-March last week, ending a three week stretch of strong gains, as investor sentiment was dampened by an acceleration in new Covid-19 cases in more than 20 U.S. states and by a cautionary message from the Federal Reserve at their monthly meeting that highlighted the potential for a more drawn-out, uneven recovery, including a long road back for the labor market. For the week, the S&P 500 and Dow Jones indexes lost -4.7% and -5.6%, respectively, while the Nasdaq Composite only lost -2.3%, due to its higher exposure to information technology and biotech companies that have generally held up better amid lockdowns and social distancing efforts. Meanwhile, the demand for safe-haven assets like Treasury bonds ramped up, driving the 10-year Treasury yield back down to 0.70% from 0.91% in the week prior. This week was set to continue the volatility following reports of a fresh outbreak over the weekend in Beijing that sparked additional resurgence concerns and resulted in Chinese health authorities implementing strict lockdowns on parts of the city. However, further announcements of stimulus efforts from the Federal Reserve and U.S. government and positive economic data have eased market jitters and reversed much of the selling pressure.
At last week’s Federal Reserve meeting, Chairman Jerome Powell indicated that the central bank would continue to supply as much stimulus as it can muster to combat the lingering economic impacts from the pandemic, including increasing its bond buying activity and signaling its intent to hold off on any increase in interest rates indefinitely. Though some market participants have cheered the persistent liquidity support across financial markets, the need for such vast amounts of stimulus also reinforces concerns to the fundamental outlook and demonstrates that the central bank is not anticipating a rapid recovery to pre-crisis economic output, which in turn would have negative implications for the corporate earnings outlook.
On Monday, the Federal Reserve announced the expansion of its bond buying program to include outstanding individual corporate bonds on the secondary market in addition to its purchases of exchange-traded funds and newly issued corporate debt. To some investors, the move signaled that the Fed would be more aggressive and proactive in buying bonds rather than being reactive to provide needed support during any further financial market stress as a backstop. For its part, the Trump Administration is also preparing a $1 trillion infrastructure proposal that could be rolled into the next coronavirus relief package.
In addition to the significant amounts of stimulus, there has been increasing media attention on the rise of day-trading activity and speculation by retail investors as a source of support for the recent market rally and a potential source of further volatility as well. The rise in retail trading activity has been encouraged by the recent competitive pressures to eliminate trading commissions at many large brokerage shops and the lack of other outlets like sports gambling. According to the American Gaming Association, legal sports wagers topped $13 billion in the U.S. in 2019. It’s not clear the extent of the impact of a rise in retail speculation, but some market observers have pointed to examples of surging stock prices among smaller, financially distressed companies like Hertz Global Holdings Inc., the rental car company that recently filed for Chapter 11 bankruptcy. Last week, Hertz won court permission to issue new equity shares totaling $1 billion to take advantage of the recent mania, even though stockholders may be wiped out in the Chapter 11 case.
In the week ahead, investors will get updates on the housing and energy markets and Jerome Powell will make several appearances before U.S. Congress. Retail sales for the month of May, which were announced Tuesday morning, far exceeded expectations by growing 17.7% off of April’s lows versus the consensus forecast for 8.1% growth. The encouraging reading demonstrated the release of some pent-up consumer demand and provided further confirmation along with the May jobs report that the beginning of the economic recovery has firmly taken root. We will continue to monitor how well this momentum is sustained in the coming weeks and will keep you apprised of the implications for financial markets and your investments.
