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Daily Capital

Weekly Market Digest: Stock Market Rally Takes a Breather

The global stock market rally finally took a breather. After a positive start to the week, equities slowly rolled over before culminating in a precipitous single day freefall on Thursday. This was at the hands of a dour outlook from the Fed and resurgence in new coronavirus cases, fueling fears of a second wave of infections and the reinstatement of government lockdowns. Bonds ended the week slightly higher, with the 10-year treasury yield falling to 0.71%. Gold was also up.

Weekly Returns

S&P 500: 3,041 (-4.8%)
FTSE All-World ex-US (VEU): (-3.6%)
US 10 Year Treasury Yield: 0.71% (-0.19%)
Gold: $1,731 (+2.9%)
EUR/USD: $1.126 (-0.3%)

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Major Events

  • Monday – House Democrats unveiled plans to overhaul policing laws in the wake of George Floyd’s death, with a focus on holding police offers more accountable for misconduct.
  • Monday – The National Bureau of Economic Research announced that the US officially fell into recession in February.
  • Tuesday – Texas reported two consecutive days of record COVID-19 hospitalizations.
  • Wednesday – The US Federal Reserve held its policy meeting where it signaled it would not raise interest rates through 2022.
  • Wednesday – US consumer prices fell 0.1% in the month of May, marking the third straight month of declines.
  • Thursday – Weekly unemployment claims came in better than expected at approximately 1.5 million.
  • Thursday – The average rate on a 30-year mortgage set a new record low, falling below 3%.
  • Friday – The U.K. economy fell more than 20% in April.

Our Take

This week’s pullback was driven by a couple of events. The first was the Fed’s policy meeting on Wednesday, where Chairman Powell struck a more cautious tone on growth expectations, suggesting there could be significant long-term damage to the economy and labor market. As a result, the central bank signaled it is likely to keep rates unchanged until at least 2022, and that it will essentially do everything in its power to help the economy regain its footing, including potential yield curve control.

But the more impactful event was news of fresh spikes in coronavirus cases in various locations around the country, including Florida, Texas, Arizona, and California, among other states. The increase in new cases comes as many of these states have begun reopening their economies, although at this point it is still unclear whether this is the root cause for the uptick. Either way, it is fueling fears that state and local governments could roll back or slow down the pace of their economic re-openings, which is causing investors to once again flee shutdown-sensitive risky assets.

The heightened volatility this week proves one thing: there is still a lot of uncertainty in how this all plays out. To some degree, an uptick in COVID cases was inevitable as economies reopen and more people interact with one another. The big question is how aggressive these resurgences become. If they remain relatively controlled and do not overwhelm the healthcare system, many states will probably continue with their reopening plans. But if they materially worsen, those locations could return to some form of full or partial lockdown. Moreover, we still don’t know the full impact of the recent mass protests, and there has always been risk of a second wave in the fall and winter. So this story is far from over.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Brendan Erne serves as the Director of Portfolio Implementation at Personal Capital. He has over 15 years of industry experience, spanning almost all levels of the investment process, including several years at Fisher Investments as an equity analyst covering the Technology and Telecommunications sectors. He also co-authored Fisher Investments on Technology, published by John Wiley & Sons. Brendan is a CFA charterholder.

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