MARKETS SURGE HEADING INTO THE THIRD QUARTER AS PENDING HOME SALES JUMP AND UNEMPLOYMENT FALLS

Weekly Market Update — July 6, 2020

S&PDrops

  • The major stock markets in the U.S. rose on the holiday-shortened week to erase more than last week’s losses as Wall Street rode the momentum into the beginning of the third quarter
  • For the week, NASDAQ once again led the way with a gain of 4.6%, pushing its YTD return to almost +14% while it closed at a record high
  • The broad-based, large-cap S&P 500 jumped 4.0% this week as it edged closer to positive numbers for the year (down 3% on the year)
  • The smaller–cap Russell 2000 had a good week, turning in 3.8% for investors while the DJIA moved up 3.2%
  • As was the case for the entire second quarter, all 11 S&P 500 sectors closed in positive territory this week, with Communication Services jumping over 5% and Financials bringing up the rear with a gain of 1.6%
  • Nonfarm payrolls jumped by 4.8 million in June, more than expected, while the unemployment rate dropped to 11.1%, down from 13.3% in May
  • Pending home sales skyrocketed 44.3% in May from the previous month
  • The 2–year Treasury yield declined to 0.15% while the 10–year ended the week at 0.67%
  • WTI crude futures rose 5.0% to just over $40/barrel

Weekly Market Performance

Close Week YTD
DJIA 25,827 3.2% -9.5%
S&P 500 3,130 4.0% -3.1%
NASDAQ 10,208 4.6% 13.8%
Russell 2000 1,432 3.8% -14.2%
MSCI EAFE 1,804 1.6% -11.3%
*Bond Index 2,364.38 0.12% 6.26%
10-Year Treasury Yield 0.67% 0.00% -1.3%

*Source: Bonds represented by the Bloomberg Barclays US Aggregate Bond TR USD. This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.

Markets Higher Heading Into the 4th of July

U.S. stock markets finished the 4–day week much higher than the previous week, heading into the long, three–day 4th of July weekend.

When the market closed on Tuesday afternoon, investors closed the books on the second quarter of 2020 and it appeared that the joy of celebrating a bunch of quarterly records for the major indices spilled over into the following two trading days to kick off the third quarter.

Retail Month

The week also saw a bit more unexpected economic data indicating that a recovery is underway, although there is still a long way to go before we’re back to where we were at the beginning of the year. Nonetheless, it was great to see favorable employment numbers reported and housing sales move up, even while a few states were backpedaling on their reopening plans.

Pending Home Sales Surge

The National Association of Realtors released its “Pending Home Sales Index” on Monday and the results were beyond expectations by a long shot. Pending sales of existing homes surged 44.3% in May, which is notable given that the previous two months saw declines. Further, when an organization like the National Association of Realtors uses words like “spectacular,” you can bet that even the data collectors were surprised by the results.

Housing

From the NAR release from June 29th:

“The Pending Home Sales Index, a forward-looking indicator of home sales based on contract signings, rose 44.3% to 99.6 in May, chronicling the highest month-over-month gain in the index since NAR started this series in January 2001. Year–over–year, contract signings fell 5.1%. An index of 100 is equal to the level of contract activity in 2001.”

“This has been a spectacular recovery for contract signings, and goes to show the resiliency of American consumers and their evergreen desire for homeownership,” said Lawrence Yun, NAR’s chief economist. “This bounce back also speaks to how the housing sector could lead the way for a broader economic recovery.”

Unemployment Drops

On Thursday, the Department of Labor released its Employment Situation Summary and there were encouraging signs as we head into the second half of the year. After losing a stunningly–high 22 million jobs in March and April, we added back 7.5 million jobs in May and June, with much of those gains happening in the last two weeks.

JOBS

Further, the unemployment rate has fallen to 11.1%, still very high by recent standards, but heading in the right direction. What is especially encouraging is the fact that weekly initial claims declined for the 13th straight week.

Directly from the release dated July 2nd:

“In June, employment in leisure and hospitality rose sharply. Notable job gains also occurred in retail trade, education and health services, other services, manufacturing, and professional and business services.”

Celebrating A Record-Setting Quarter

Global equity markets continued their rebound from the dismal first quarter of 2020 and by the time the second quarter closed, the major U.S. indices had marched to record quarterly gains, including:

  • The DJIA recording its best quarter since the first quarter of 1987, with a gain of 17.8%
  • The S&P 500 recording its best quarter since the fourth quarter of 1998, leaping 19.9%
  • NASDAQ recording its best quarter since the fourth quarter of 1999, soaring 30.6%

It should be noted that the second-quarter rally came after a dismal first quarter and the contrast between the two quarters is dramatic, as the first quarter saw:

Despite the barrage of negative economic news in the second quarter, Wall Street was optimistic as the economy gradually reopened for business.

  • The DJIA turn in its worst quarter in history with a 23.2% drop
  • The S&P 500 turn in its worst quarter since 2008 with a 20% drop
  • NASDAQ turn in its worst quarter since 2018, with a 14.2% drop

Keep the Record Numbers in Perspective

When the final bell rang at 4 pm EST on Tuesday, June 30th, Wall Street rejoiced in the fact that the major U.S. stock market indices had turned in three straight positive months, leading to record quarterly gains.

Perspective

Within hours of markets closing the books on the second quarter, the media piled on too, with headlines like:

  • U.S. Stocks Finish Best Quarter in More Than 20 Years, Wall Street Journal, June 30th at 4:59 pm EST
  • It’s official: This was the best quarter for stocks since 1998, Associated Press, June 30th at 5:47 pm EST
  • Dow notches best quarter since 1987, USA Today, June 30th at 6:41 pm EST

While investors are no doubt thankful for the second quarter’s performance, it’s important to keep these “performance records” in perspective, however.

Consider this example:

Does the 40% feel record-setting to you? Maybe not.

  • You have an investment worth $100 on January 1st and its value drops by 30% in three months.
  • On April 1st, your investment is worth $70.
  • Over the next 3 months, your investment rises a “record-setting” 40%.
  • On July 1st, your investment is worth $98

Sources

bls.govnar.realtornyse.commsci.comnasdaq.comdowjones.commorningstar.combloomberg.com

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