July 2020 Monthly Review - Q3 Starts with Both Historic Highs and Lows
- July 2020 was full of market volatility, unprecedented macroeconomic data, and a few asset class records. Gold and precious metal markets soared as the dollar tumbled. Equity markets continued to rally in the US and abroad, as a large portion of the US Treasury curve notched all-time low yields. Economic data, pandemic vaccine hopes, Fed policy, and fiscal stimulus negotiations were all market movers during the month. These factors and the upcoming election will continue to shape the third quarter.
- To start the month, on July 1, Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, warned that the US could see over 100,000 new cases a day, . while simultaneously Pfizer announced preliminary data demonstrating that a vaccine can produce neutralizing antibodies and may be available as soon as 2020. July saw additional positive late-stage reports from companies including Johnson & Johnson, Moderna, and AstraZeneca. Markets seemed tilted towards a plausible solution by year-end 2020.
- Monthly jobs data provided support to stock and credit markets. Nonfarm payrolls added +4,800,000 jobs and the unemployment rate fell from 13.3% to 11.1% suggesting jobs were coming back despite the virus. Throughout July, better than expected economic data came from the manufacturing sector, retails sales, home sales, and durable goods orders. However, one piece of economic data investors could not ignore was the sharpest quarterly decline in GDP since 1947, -32.9% in Q2-2020.
- Despite second quarter GDP results, broad global market segments in stocks, bonds, and commodities continued to rally. The S&P 500 Index rallied +5.64% and the bond market returned +1.49% (Bloomberg Barclays US Aggregate Total Return Index). Bond market returns were driven by demand for both corporate and municipal bonds, as well as interest rates falling to record-lows. Despite tepid demand for this month’s large treasury auctions, high valuations in global markets and uncertainty have kept treasury markets well bid.
- Both stock and bond markets were overshadowed by the move in precious metals. Gold was up +10.9% in July while silver surged over +33.0%. Investors scooped up precious metals as the dollar fell and the FOMC reinforced the notion that interest rates would remain low for a long period. The steep fall in the dollar caused investors to question if it would remain a “safety” currency and if future discussions about a potential return to metal-based currency would surface.
- Minutes from the Federal Reserve, released at the beginning of the month, suggested the committee debated the idea of “yield curve control.” The Fed came short of yield curve control at their July 28-29 FOMC Meeting, but the tone remained unarguably “dovish.” Risk markets reacted positively to the sound bite from Fed Chairman, Jerome Powell, that that committee is “not even thinking about, thinking about raising rates”.
- Earnings season started and results were generally positive versus analysts’ expectations. Bank earnings showed some promising results and large tech firms reported solid numbers across the board..
- On July 17th former Fed chairs, Janet Yellen and Ben Bernanke testified to Congress on Covid-19 and the response to the economic crisis including the need for further fiscal support to state and local governments. The debate over further stimulus became a political focus which the municipal bond market is closely monitoring. Currently, the potential additional relief for state and local municipalities ranges from $0 - $1 trillion.
- Markets seem to have climbed a “wall of worry” over the last few months as heightened uncertainty continues. Ambiguity around economic re-openings and the race for a Covid-19 vaccine will continue to drive markets while investor attention shifts towards the impending presidential election.
The Piton team continues to focus on constructing high quality portfolios that will perform over the long-term with a relatively lower standard deviation than many comparable bond funds, ETF’s and fixed income strategies.
In the short-term, we believe that constructive developments will continue to emerge from healthcare and pharmaceutical companies. Despite this positive bias, we recognize the election will be divisive and will likely create volatility in the coming months. While it is tempting to chase yield due to the promise of another prolonged zero-interest-rate environment, we plan to remain cautious throughout the upcoming election season.