Monday, June,29 2020

Capital Markets Overview

Market stung by multiple thorns

••• The S&P 500 dropped 2.4% on Friday in a risk-off session amid the continued rise in new coronavirus cases and industry-specific issues for the banks and social media companies. The Dow Jones Industrial Average (-2.8%), Nasdaq Composite (-2.6%), and Russell 2000 (-2.4%) also fell more than 2.0%. All 11 S&P 500 sectors closed in negative territory, with the financials (-4.3%) and communication services (-4.5%) sectors falling more than 4%. The utilities sector declined the least with a 1.0% decline. The U.S. hit another daily record for new coronavirus cases, prompting hotspots like Texas and Florida to scale back their reopening efforts. The reduced reopening activity threatens to undermine consumer sentiment and personal spending, the latter of which rebounded 8.2% m/m in May ( consensus +7.0%). Unfortunately, the market was also burdened by other developments. Banks were pressured by the Fed`s decision to require them to suspend share repurchases and cap dividend payments in the third quarter (out of an abundance of caution), while more companies suspended ad spending on Facebook (FB 216.08, -19.60, -8.3%). Verizon (VZ 53.16, -1.12, -2.1%), Unilever (UN 54.51, -0.32, -0.6%), and Honda Motor (HMC 25.33, -0.92, -3.5%) joined the growing list of companies that paused spending, which was a wake-up call for companies that derive revenue from advertising in how they handle misconduct within their platforms. Facebook shares fell 8%, but Alphabet (GOOG 1359.90, -81.43, -5.7%) and Twitter (TWTR 29.05, -2.32, -7.4%) also took it on the chin.In other developments, Nike (NKE 93.67, -7.73, -7.6%) missed top and bottom-line estimates, Cisco (CSCO 46.31, +1.09, +2.4%) was the lone Dow component to close higher amid news that the Trump administration is thinking about helping the company in 5G development, and the yearly rebalancing of the FTSE Russell indices happened at the close.  Quarter-end rebalancing might have played a part in today`s decline, too, as investors re-allocated money into bonds. The 2-yr yield was unchanged at 0.16%, while the 10-yr yield declined four basis points to 0.64%. The U.S. Dollar Index was little changed at 97.45. WTI crude declined 0.7%, or $0.26, to $38.49/bbl. 

••• Reviewing economic data: 
Reviewing Friday`s economic data:

•   Personal income declined 4.2% m/m in May ( consensus -6.0%) following a 10.8% increase in April while personal spending surged 8.2% ( consensus 7.0%) after declining 12.6% in April. The PCE Price Index and core-PCE Price Index, which excludes food and energy, were both up 0.1% and slightly ahead of consensus estimates.
•   The key takeaway from the report is that the personal savings rate, as a percentage of disposable income, remains exceptionally high at 23.2%. • • Granted that`s down from 32.2% in April, but a high savings rate means less spending activity, which means less economic growth.
• The final University of Michigan Index of Consumer Sentiment for June slipped to 78.1 ( consensus 78.8) from the preliminary reading of 78.9. The final reading for May was 72.3, so the sentiment level is still higher than the prior month.
•   The key takeaway from the report is the contention that consumer attitudes and demand will be influenced by the progress -- or lack thereof -- against the coronavirus.

••• Looking Ahead: 
•  Looking ahead, investors will receive the Pending Home Sales report for May on Monday.

••• Top Market drivers:
•  Market loses nearly 3%, stung by multiple thorns 
•   U.S. tallies another daily record in new coronavirus cases, Texas and Florida scale back reopening efforts
•   Fed will require banks to suspend share repurchases and cap dividend payments in the third quarter to retain resiliency
•   More companies suspend ad spending on Facebook (FB) 

••• Stock Market Sectors:
• Strong: Utilities
•   Weak: Financials, Communication Services, Energy

Chief Investment Strategist

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