Weekly Recap: COVID-19 Market Edition

Ryan NaumanMarket Strategistryan.nauman@informa.com

For the week ending July 17, 2020

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It was a volatile week of trading as investors digested news that the number of new COVID-19 cases have spiked in the U.S. while promising news regarding treatments and vaccinations provided a boost for equities, as the S&P 500 index posted a +1.27% return. Additionally, earnings season kicked off in earnest, and as expected, the results have been mixed.

The highlight of the week in terms of economic data was the continued rebound for retail sales. Sales increased 7.5% in June which follows a record 18.2% increase in May. Despite the stellar numbers in May and June, sales remain below January levels. However, the two-month rebound has put retail sales 1.1% higher than one year ago. The National Federation of Independent Business’ small business index rose to 100.6 in June from 94.4 in May. Finally, an increase in gas and food prices boosted the overall cost of consumer goods and services by 0.6% in June. Furthermore, the core CPI rose 0.2% in June. The solid retail sales numbers and increase in small-business confidence is good news for investors, however, a second wave of coronavirus cases could dampen the recovery.

The second quarter earnings season kicked off this week. If this cycle follows expectations (y-o-y earnings growth of -45%), it will be the worst quarter for earnings growth since the Great Financial Crisis (GFC). To date, 9% of the S&P 500 companies have reported earnings, with 73% of them beating earnings estimates and 78% beating revenue expectations. Furthermore, the current earnings growth for Q2 sits at -44.0%, which would mark the largest year-over-year decline in earnings since Q4 2008 (-69.1%). The combination of poor forecasted earnings and the equity price rally has pushed the forward 12-month P/E ratio for the S&P 500 index up to 22.3, which is well above the 5-year and 10-year averages. (Source: Factset)

Cares Act CliffEarlier this week i discussed the economic impact of the upcoming expiration of the CARES Act on TD Ameritrade’s Market on Close segment with host Oliver Renick. Additionally, the subject was the focus of Joe Weisenthal’s portion of Bloomberg’s “5 Things To Start Your Day” newsletter. Here are my thoughts on the matter. It’s no coincidence that the start of the market rally on March 23rd coincided with the CARES Act and historic monetary stimulus. The Federal Reserve and congress acted quickly and strongly back in March; however, the light is shining back on congress again as the CARES Act stimulus package nears its expiration. The ending of the CARES Act is a risk to the economic recovery and puts the pressure squarely on Capital Hill to see if they will help support businesses and households again, especially considering the potential for additional shutdowns.

During JPMorgan Chase’s earnings call this week, the executives stated that May and June were made much easier for households due to the CARES Act, however, rougher seas are ahead. This is because the additional unemployment insurance benefits that provided additional monetary support for households is coming to an end. For a historical perspective, during times of economic expansion, unemployment insurance makes up about 0.1% - 0.3% of personal income. However, unemployment insurance as a percentage of personal income has spiked to 6.4% during this crisis, which is well above the 1.3% during the GFC. In fact, this is the highest percentage going back to 1960, with the next highest being 1.5%. The additional $600 of unemployment benefits helped replace the income lost for the 17 plus million people who are collecting unemployment benefits, which is evidenced by the strong recovery in retail sales despite the historic amount of unemployed workers. Furthermore, the pace of initial jobless claims has slowed, however, 1.3 million people filed initial jobless claims during the week ending July 11th, which shows there is still a major demand for unemployment benefits.

In addition to the commentary, the actions of JPMorgan Chase along with the other large banks signal that the difficult times may get worse, as the banks beefed up their loan provisions to help protect against a spike in loan defaults. For example, JPMorgan, Wells Fargo, Bank of America and Citigroup have set aside $35 bil combined to absorb loan losses. Additionally, delinquency rates at Freddie Mac and Fannie Mae have started to increase.

These difficult times could be made worse by the elimination of the additional unemployment benefits and a rollback of business and economic reopening’s.

Congress will feel pressure to extend or implement new stimulus to help support the economy and households, especially if we experience additional shutdowns. I believe the economic rebound and market rally will hinge on additional stimulus as new cases of the coronavirus spike. There obviously is a cost to additional stimulus packages, especially considering the $860 billion budget deficit in June, however, I think we will see a very light version of the CARES Act to help buy additional time for the economy to weather this pandemic storm.

Commentary

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Sources: Zephyr StyleADVISOR, Macrobond, PSN Enterprise, Bloomberg. 1 week data as of 7/17/20, unless otherwise stated, time periods over 1 week as of 6/30/20. Equity Style Performance represented by: Large Value – Russell 1000 Value, Large Blend – Russell 1000, Large Growth – Russell 1000 Growth, Mid Value – Russell MidCap Value, Mid Blend – Russell MidCap, Mid Growth –Russell MidCap Growth, Small Value – Russell 2000 Value, Small Blend – Russell 2000, Small Growth – Russell 2000 Growth. Fund flow data (EPFR Global) 7/9/20 –7/15/20, S&P 500 (Large Cap Blend flows), Russell 3000 (all U.S. equity flows), Russell 1000 (all Large Cap flows), Russell Mid Cap (all Mid Cap flows), Russell 2000 (all Small Cap flows), MSCI EAFE (Western Europe DM, Asia Pacific DM flows) MSCI EM (All Emerging Market flows), MSCI World (All Developed Markets flows)

Global Asset Class Performance

Index 1 Week 3-Mos YTD 1 Year 3 Year Flows (mil)S&P 500 1.27% 20.54% -3.08% 7.51% 10.73% $3,941

Russell 3000 1.34% 22.03% -3.48% 6.53% 10.04% $1,649

Russell 1000 1.21% 21.82% -2.81% 7.48% 10.64% $1,512

Russell MidCap 3.04% 24.61% -9.13% -2.24% 5.79% ($1,106)

Russell 2000 3.57% 25.42% -12.98% -6.63% 2.01% $1,647

MSCI EAFE 2.20% 15.08% -11.07% -4.73% 1.30% $1,103

MSCI EM -1.21% 18.18% -9.67% -3.05% 2.27% ($1,733)

MSCI World 1.53% 19.54% -5.48% 3.40% 7.29% $6,497

1 Mos Value Blend GrowthLarge -0.66% 2.21% 4.35%

Mid 1.13% 1.80% 2.34%

Small 2.90% 3.53% 3.84%

YTD Value Blend Growth

Large -16.26% -2.81% 9.81%

Mid -18.09% -9.13% 4.16%

Small -23.50% -12.98% -3.06%

Factor Index 3 Mos YTD 1 YR Risk-Adj %

MSCI USA Small Cap 27.07% -12.66% -2.73%

MSCI USA Value 12.95% -16.12% -7.46%MSCI USA Minimum Volatility 12.86% -6.49% 0.03%

MSCI USA Momentum 23.58% 5.19% 12.84%

MSCI USA Quality 19.76% 1.77% 18.26%

MSCI USA Dividend Tilt 15.58% -8.39% 1.78%

Index 1 Week 3-Mos YTD 1 Year 3 Year YieldBloomberg Barclays US Aggregate 0.23% 2.90% 6.14% 8.74% 5.32% 1.20

Bloomberg Barclays US High Yield 1.14% 10.18% -3.80% 0.03% 3.33% 6.55Bloomberg Barclays Municipals 10 Yr 0.50% 2.88% 2.47% 4.74% 4.37% 1.17

Major Equity Asset Class Performance Equity Style Performance Equity Factor Performance

7/17/20 7/10/20 6/30/20 12/31/19 7/17/19 7/17/172-yr U.S. Treasuries 0.14 0.16 0.16 1.58 1.83 1.3610-yr U.S. Treasuries 0.64 0.65 0.66 1.92 2.06 2.3130-yr U.S. Treasuries 1.33 1.33 1.41 2.39 2.57 2.8910-yr German -0.48 -0.50 -0.50 -0.19 -0.30 0.5810-yr Japan -0.01 0.00 0.03 -0.03 -0.14 0.0810-yr U.K. 0.19 0.19 0.21 0.74 0.76 1.33

Major Fixed Income Asset Class Performance

Rates

Chart of the Week: The S&P 500 Is +10% Over The Past 12 MonthsZephyr StyleADVISOR Zephyr Associates

Thursday, July 18, 2019 - Friday, July 17, 2020 (Single Computation)

75

80

85

90

95

100

105

110

115

Jul 17, 2019 Sep 03, 2019 Oct 18, 2019 Dec 05, 2019 Jan 24, 2020 Mar 12, 2020 Apr 29, 2020 Jul 17, 2020

S&P 500

COVID-19 Dashboard: The U.S. Is The Epicenter Of The Crisis

Source: Macrobond, World Health Organization 4

Source: Macrobond, World Health Organization 5

COVID-19 Dashboard: Market Volatility Has Returned As Cases Have Increased

Source: Macrobond, Centers for Disease Control & Prevention 6

COVID-19 Dashboard: U.S. Cases Climb Higher Driven By Increases In The South & West

7Source: Macrobond, World Health Organization, Citi

COVID-19 Dashboard: Citi Macro Risk Index Has Stabilized Recently As COVID-19 Cases Have Increased

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Markets: The S&P 500 Is +10% Over The Past 12 Months

Zephyr StyleADVISOR Zephyr Associates

Thursday, July 18, 2019 - Friday, July 17, 2020 (Single Computation)

75

80

85

90

95

100

105

110

115

Jul 17, 2019 Sep 03, 2019 Oct 18, 2019 Dec 05, 2019 Jan 24, 2020 Mar 12, 2020 Apr 29, 2020 Jul 17, 2020

S&P 500

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Markets: The S&P 500 Is 4.15% Away From Its High-Water Mark

Zephyr StyleADVISOR Zephyr AssociatesThursday, January 2, 2020 - Friday, July 17, 2020

-45%

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%0%

Jan 01, 2020 Jan 30, 2020 Feb 28, 2020 Mar 27, 2020 Apr 28, 2020 May 28, 2020 Jul 17, 2020

S&P 500MSCI EAFEMSCI EM (EMERGING MARKETS)Gold London PM FixingRussell 2000

Thursday, January 2, 2020 - Friday, July 17, 2020: Summary Statistics

S&P 500

MSCI EAFE

MSCI EM (EMERGING MARKETS)

Gold London PM Fixing

Russell 2000

S&P 500

MaxDrawdown

MaxDrawdownBegin Date

MaxDrawdownEnd Date

MaxDrawdown

Length

Max Drawdown

Recovery DatePainIndex

PainRatio

High WaterMark Date

To HighWater Mark

-33.79% Feb 20, 2020 Mar 23, 2020 23 N/A 10.31% 0.06 Feb 19, 2020 4.15%

-33.86% Jan 21, 2020 Mar 23, 2020 44 N/A 12.89% -0.62 Jan 17, 2020 9.11%

-33.71% Jan 21, 2020 Mar 23, 2020 44 N/A 13.55% -0.35 Jan 17, 2020 6.95%

-12.44% Mar 9, 2020 Mar 19, 2020 9 Apr 14, 2020 1.89% 9.87 Jul 9, 2020 0.26%

-41.72% Jan 17, 2020 Mar 18, 2020 42 N/A 16.70% -0.68 Jan 16, 2020 14.89%

-33.79% Feb 20, 2020 Mar 23, 2020 23 N/A 10.31% 0.06 Feb 19, 2020 4.15%

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Markets: The Basic Materials & Tech Sectors Are +50% Since March 23

Zephyr StyleADVISOR Zephyr Associates

Monday, March 23, 2020 - Friday, July 17, 2020 (not annualized if less than 1 year)

Ret

urn

0

10

20

30

40

50

60

AnalysisPeriod

Dow Jones U.S. Basic MaterialsDow Jones U.S. TechnologyDow Jones U.S. Consumer ServicesDow Jones U.S. Oil & GasDow Jones U.S. CompositeDow Jones U.S. Consumer GoodsDow Jones U.S. IndustrialsDow Jones U.S. Health CareDow Jones U.S. FinancialsDow Jones U.S. UtilitiesDow Jones U.S. TelecommunicationsS&P 500

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Markets: Chinese Equities Are +12% YTD

Zephyr StyleADVISOR Zephyr Associates

Thursday, January 2, 2020 - Friday, July 17, 2020 (not annualized if less than 1 year)

Return

-30 -20 -10 0 10 20

YTD

MSCI ChinaMSCI SwitzerlandMSCI JapanMSCI KoreaMSCI CanadaMSCI GermanyMSCI AustraliaMSCI United KingdomMSCI RussiaMSCI ItalyMSCI SpainMSCI MexicoMSCI BrazilS&P 500

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Markets: Haven Treasuries Continue to Outperform YTD

Zephyr StyleADVISOR Zephyr Associates

Thursday, January 2, 2020 - Friday, July 17, 2020 (not annualized if less than 1 year)

Ret

urn

-2

0

2

4

6

8

10

12

YTD

Barclays U.S. Treasury: 7-10 YearBarclays U.S. AggregateBarclays U.S. Corporate Investment GradeBarclays U.S. Treasury: 1-3 YearBarclays Municipal BondBarclays Global x US BondBarclays U.S. Corporate High Yield

13

Markets: All Four Portfolios Are Now Positive YTD

Zephyr StyleADVISOR Zephyr AssociatesThursday, January 2, 2020 - Friday, July 17, 2020 (Single Computation)

75

80

85

90

95

100

105

110

Jan 01, 2020 Jan 28, 2020 Feb 24, 2020 Mar 19, 2020 Apr 15, 2020 May 11, 2020 Jun 05, 2020 Jul 17, 2020

20% S&P 500/80% Bloomberg Barclays Agg 40% S&P 500/60% Bloomberg Barclays Agg 60% S&P 500/40% Bloomberg Barclays Agg 80% S&P 500/20% Bloomberg Barclays Agg

Blend WeightsAs of July 17, 2020

20% S&P 500/80% Bloomberg Barclays Agg 40% S&P 500/60% Bloomberg Barclays Agg

60% S&P 500/40% Bloomberg Barclays Agg 80% S&P 500/20% Bloomberg Barclays Agg

81.0%

19.0%

38.5%

61.5%

41.5%

58.5%

79.0%

21.0%

S&P 500Barclays U.S. Aggregate

Source: Macrobond, BEA 14

Economy: Q1 GDP Falls to ‘08 Levels While Shrinking Services Consumption Is The Biggest Culprit

Source: Macrobond, U.S. Department of Labor, BLS, BEA 15

Economy: Unemployment Claims Climb Above 51 Million Over The Past 17 Weeks, While The Unemployment Rate Falls

Source: Macrobond, Citi 16

Economy: The Citi Economic Surprise Index Has Spike As Economic Data Has Surprised Economists

Source: Macrobond, U.S. Census Bureau 17

Economy: Retail Sales Are 1% Higher Than 12-Months Ago, While Closing In On January Levels

Source: Macrobond, U.S. Census Bureau 18

Economy: Retail sales Continue To Rebound But Are Still Below January Levels

Source: Macrobond, Fannie Mae, Freddie Mac 19

Economy: Fannie & Freddie Mortgage Delinquencies On The Uptick

Source: Macrobond, BEA 20

Economy: Unemployment Benefits As A % Of Personal Income Has Spiked Due to CARES Act

Source: Macrobond, Federal Reserve 21

Fiscal Policy: The Fed’s Balance Sheet Shrinks Below $7 Trillion

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All Eyes On……..

Day Event/Earnings

Monday, July 20

None ScheduledInternational Business Machines Corporation, Haliburton Company

Tuesday, July 21

U.S. Chicago Fed National Activity Index (June)Lockheed Martin Corporation, Snap Inc., Texas Instruments Incorporated, Philip Morris International Inc., United Airlines Holdings Inc.

Wednesday, July 22

U.S. Existing Home Sales (June)Microsoft Corporation, Tesla, Inc., Glaxosmithkline Plc., CSX Corporation,

Thursday, July 23

U.S. Jobless Claims (July 18), Leading Economic Indicators (June)Amazon.com, AT&T Inc., Intel Corporation. Twitter, Inc., American Airlines, Southwest Airlines, Alaska Air Group

Friday, July 24

U.S. Markit Manufacturing Flash PMI (July), Markit Services Flash PMI (July), New Home Sales (June)

Earnings season picks up steam during the week ahead. The week contains earnings releases from companies that have taken the brunt of the COVID-19 crisis, such as United Airlines, American Airlines, and Southwest Airlines. Meanwhile, we also hear from some of the tech companies who benefited from the very poplar “shelter-in-place” and momentum trades, such as Microsoft, Amazon.com, and Snap Inc. With that being said, I most look forward to Tesla’s call, which is typically very eventful. Tesla shares, which have been the poster child of the “momentum trade”, have been on a rocket since March 18 (+316%) and is currently trading at 223 times forward earnings. In order to justify the current price, Tesla needs to releasegood earnings and a promising forward outlook.

About Ryan Nauman

As Market Strategist, Ryan Nauman’s primary focus is providing value added market and investment insight along with educating buy-side participants on investment analytics and portfolio management concepts.

Ryan provides analysis and research on market trends across asset classes, sectors, and regions to help empower better decisions for creating asset allocation strategies. His insight is disseminated through white papers, articles, training, and interviews with a target audience of financial advisors, portfolio managers, and investment analysts.

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