Stocks took a breather this week, dropping a couple of percentage points, as investors grappled with the dichotomy of improving economic data and worsening U.S. COVID-19 trends. Biotech was a bright spot, and international markets (particularly emerging) held up relatively better than the broader market.
The current calculus for market watchers is challenging. On the one hand, we see sizeable month-on-month improvement in economic data, such as durable goods new orders. On the other hand, COVID-19 trends in the U.S. are poor, and as a result, the reopening story is cloudy at best. And let’s not forget the uncertainty surrounding the anticipated forthcoming stimulus from the Fed and lawmakers.
These volatile times will excite emotions but should not influence investment decisions. We often see uncertainty prompt investors to request a wholesale exit of the stock market or even go “all in” on recovery. Such behavior is what we call market timing. Uncertainty may be high, but we know that trying to outguess the stock market through market timing, on average, has proven to damage long-term returns.
Our advice? Understand your risk tolerance (our advisors can help with that), invest consistently in line with that risk tolerance, and continue to focus on living your best life!
Monthly Growth in Durable Goods New Orders
New orders of durable goods (like cars and washing machines), saw an increase of 15.8% in May versus April, as states continued the process of reopening the economy. While this is good progress, durable good orders are down nearly 18% from May of last year. All of those new cars will come in handy as there is still quite a distance to travel on the road to recovery.
Headlines This Week
- Weekly jobless claims came in slightly above expectations with 1.48 Million new applications.
- On the positive side, continuing claims fell below 20 Million to 19.5 Million, a sign that people are returning to work.
- The Durable Goods New Orders report surprised economists (up 15.8%) as Americans were buying cars and washing machines at a higher rate than expected in May.
- Personal income fell less than expected at 4.2%, and consumer spending jumped 8.2% in May, which was a record monthly increase.
- The U.S. first quarter Gross Domestic Product (GDP) final read was a non-event as a previously estimated 5% decline was affirmed.
The International Monetary Fund (IMF) lowered its global GDP forecast to a 4.9% decline this year. The previous forecast in April was for a 3% contraction.
- The 2021 forecast predicts 5.4% global growth.
- The U.S. forecast anticipates an 8% decline for 2020 and a 4.5% expansion in 2021.
Deal or No Deal?
White House trade advisor, Peter Navarro, roiled the markets when in a Fox News interview, he said, “It’s over. Yes,” in regards to a trade deal with China.
- The President took to twitter to assure the markets that the deal remains intact.
- Trade Representative, Robert Lighthizer, and Chinese officials also dismissed Navarro’s remarks.
Not Toasting to That
In further trade and tariff news, the President is considering $3.1 Billion of new tariffs on products from France, Germany, Spain, and the United Kingdom.
- The items targeted include olives, coffee, chocolate, beer, and gin.
- Machinery and trucks are also on the list.
The Federal Reserve told the biggest banks this week that they performed well in their annual stress test.
- However, the central bank told the banks they cannot increase dividends nor buy back their stock, at least through the third quarter of this year.
- Furthermore, the Federal Reserve utilized what’s known as a “Three scenario side-test” for this year’s stress test, related to the pandemic, aimed at illustrating three downside scenarios.
- The 34 banks will release their plans on Monday however, Fed Reserve Vice Chair, Randal K. Quarles, stated, “the results of our sensitivity analyses show that our banks can remain strong in the face of even the harshest shocks.”
The Week Ahead
One of the biggest stories next week is likely to be the latest unemployment rate, released on Thursday.
- Consensus figures put the new rate at 12.2%, down from 13.3%.
- Also on Thursday, non-farm payrolls for June and initial and continuing jobless claims will help determine the direction of investor sentiment.
- On Wednesday, the ADP Employment Change report will be released which could provide a preview of what to expect on Thursday.
Fed Chairman Jerome Powell and Treasury Secretary Steven Mnuchin are both scheduled to testify on Tuesday about the financial response to COVID-19.
- The FOMC meeting minutes, released on Wednesday, should provide additional detail about possible next steps to support the economy.
The Consumer Confidence report is set to be released on Tuesday.
- Given how vital the consumer is to economic recovery, the level of confidence could have a significant impact on the direction of the market next week.
Wednesday, Russians will vote on a referendum for constitutional change.
- The proposed constitutional changes would provide for a reset to term limits on the Presidency, allowing Vladimir Putin to maintain a hold on the office until 2036.
- Putin has been in power since 2000 and is currently set to be termed out in 2024.
Saturday, July 4th is Independence Day in the U.S. Markets will be closed on Friday, July 3rd in observance of the holiday.
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