June Market Overview
The majority of global equity markets climbed again in June, with the S&P 500 increasing 2% to finish the quarter with a 20.4% gain, the strongest quarterly gain in over 20 years. However, as we have discussed previously, these gains are not representative of all stocks as there continues to be a dichotomy in the market. For instance, large cap value (as measured by the Russell 1000 Value Index) actually declined 0.70% in June while large cap growth (as measured by the Russell 1000 Growth Index) increased 4.4% for the month. For the quarter, large value rose 14.3%, while large growth rose 27.8%. Technology stocks, which are a much higher weight in the large cap growth index, continue to rally; this explains much of the performance gap.
In Fixed Income, interest rates were little changed overall, though short-term rates have tended to remain very low while longer-term rates have nudged upward; in other words, the yield curve is steepening. This is a sign that fixed income investors are beginning to price in a more optimistic outlook.
In early June, the National Bureau of Economic Research declared that the U.S. officially entered a recession in February, marking the end of the longest economic expansion in U.S. history at 128 months. Estimates call for a dramatic contraction in GDP for the second quarter and a strong rebound for the third quarter, so it’s possible the recession is already over.
Coronavirus news continues to dominate the headlines, and it has been interesting that markets have continued to climb even as a second wave of cases has emerged in some parts of the country and several states and municipalities have backpedaled on reopening plans. While there isn’t any single driver of this phenomenon, we have seen several positive economic datapoints and we also believe the rally is in part explained by the absence of any compelling alternatives to stocks in light of the extremely low interest rate environment and the fact that there is ample cash on the sidelines to support equities.
Some of the economic datapoints that have proven encouraging – and have justifiably bolstered market optimism – include: the most recent data for U.S. durable goods orders, which rebounded sharply from the prior month; and the ISM Manufacturing index, which climbed dramatically in June and is now in expansionary territory again.
Employment data has perhaps been the most encouraging news, however. As we mentioned in our last note, the May jobs report was well ahead of forecasts, which has also helped fuel investor optimism. The June jobs report, released in early July, also far exceeded expectations with payroll gains of 4.8M, far surpassing the market’s expectation for a 2.9M gain.
Coming up on the horizon, investors will soon hear from corporations on results from the second quarter. This will be a particularly interesting quarter considering the widespread shutdowns of the economy and because most companies did not provide guidance for the investment community, so expectations vary widely.
The monthly Market Overview is written by two members of MACRO’s Investment Committee, Mark Cortazzo, CFP®, CIMA®, and Christopher Moffett, CFA.
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