Investment Commentary – May 27, 2020

Year to Date Market Indices as of Market Close May 27, 2020
• Dow 25,139 (-11.94%)
• S&P 2,984 (-7.61%)
• NASDAQ 9,205 (2.60%)
• Gold $1,695 (11.55%)
• Oil $32.82 (-46.40%)
• Barclay Bond Aggregate (4.26%)
• Fed Funds Rate 0-0.25 (0-0.25 3/16/20)
• US Real GDP Growth -4.8 Q/2020

Nasdaq and S&P 500 turn negative as stocks lose buoyancy amid U.S.-China spat

China’s Foreign Ministry said Beijing would strike back at the U.S. if it took any action over proposed security laws in Hong Kong

U.S. stocks slipped Wednesday, led by technology stocks, as worries about escalating tensions between the China and the U.S. edged out optimism over businesses reopening as the coronavirus pandemic recedes and economic aid packages by governments.

What are major indexes doing?

The Dow Jones Industrial Average DJIA, 0.92% advanced 74 points, or 0.3%, to 25,069. The S&P 500 SPX, 0.14% fell 15 points, or 0.5%, to 2,977. The Nasdaq Composite COMP, -1.03% retreated 165 points, or 1.7%, to 9,175.

On Tuesday the Dow jumped 529.95 points or 2.2%, to finish at 24,995.11, while the S&P advanced 36.32 points, or 1.2%, to end at 2,991.77, after briefly breaching the 3,000 level for the first time since March 5. The Nasdaq Composite finished at 9,340.22, up 15.63 points, or 0.2%.

What’s driving the stock market

Worries around rising U.S.-China tensions and the threat of a second wave of COVID-19 infections threatened the optimistic tone in risk assets.

Protests in Hong Kong and deteriorating U.S.-China relations shouldn’t be ignored, said Fawad Razaqzada, market analyst with Think Markets, in a note.

President Donald Trump has said he would make an announcement by the end of the week regarding China’s efforts to impose new security laws that would undercut Hong Kong’s autonomy. And China’s Foreign Ministry said on Wednesday it would strike back at the U.S. if it took any action over the security laws.

That could be a catalyst for a “risk-off” move in markets, requiring traders to remain nimble, said Razaqzada.

Dow posts best percent gain since 1933 on hope for plan to rescue economy from coronavirus

U.S. stocks soared Tuesday, with the Dow Jones Industrial Average notching its biggest one-day point gain ever and its best percentage gain since 1933, a day after plumbing the lowest levels since 2016, amid growing optimism that Congress will come to an agreement on a fiscal stimulus package aimed at combatting the economic impact of the coronavirus epidemic.

How did benchmarks perform?

The Dow DJIA, +11.36% rose 2,112.98 points, or 11.37%, to close at 20,704.91, the S&P 500 index SPX, +9.38% advanced 209.93 points, 9.38%, to close at 2,447.33, and the Nasdaq Composite index COMP, +8.12% gained 557.18 points, or 8.12%, ending trading at 7,417.86.

For the year to date though, the Dow is down 27.45%, the S&P 500 has lost 24.25%, and the technology-heavy Nasdaq is 17.33% lower.

What drove the market?

U.S. lawmakers inched toward an agreement on a roughly $2 trillion coronavirus rescue package, helping to reignite buying on Wall Street for the moment, after lawmakers on Monday twice failed to reach an agreement, sending stocks into a fresh tailspin.

Senate Minority Leader Chuck Schumer said from the Senate floor that he had “very good” discussions with U.S. Treasury Secretary Steven Mnuchin, and just before noon claimed that an agreement was on the “two-yard line.” The trading day ended with no concrete next steps in place, but some investors suggested the market sell-off of the past few weeks may have been overdone.

“Even in bear markets, you can end up being oversold, and I think that this market was stretched like a rubber band that, at least in the near term, was ready to snap back,” Sam Stovall, chief investment officer at CFRA Research told MarketWatch.

Congress shifts coronavirus focus to small business aid

An overhaul of small business aid will be the next thing Congress focuses on in hopes of helping employers reopen shops and survive coronavirus pandemic.

Legislation that would give small employers more time to take advantage of federal subsidies for payroll and other costs is expected to pass the House this week.

So far, no formal talks have been scheduled between congressional leaders on the next “phase” of the federal coronavirus response.

Democrats have already pushed a $3 trillion-plus measure through the House, but negotiations with the GOP-controlled Senate and White House have yet to begin.

“We can’t keep propping up the economy forever,” Senate Majority Leader Mitch McConnell said Tuesday in Lexington. It was one of his first public appearances in his home state of Kentucky since mid-March due to the pandemic. “The ultimate solution is to begin to get back to normal,” he said. “There are three things that are essential to have full normalcy — testing, treatment and vaccine.”

Senate Republicans are divided on the next steps and wary of another sprawling negotiation where Democrats and the White House call the shots.

Republicans are enthusiastic about improving The Paycheck Protection Program, which was established in March under the $2 trillion CARES Act and was replenished last month. All told, Congress has provided about $660 billion for the program.

The House bill would provide a 24-week window to spend PPP funds and would eliminate a requirement that 75 percent of the forgivable loans be used for payroll costs. The goal is to give business more flexibility to pay rent and other overhead costs such as installing protective equipment.

Under the original program, businesses are required to spend their loan money within the eight-week window to have their loans forgiven. That deadline is fast approaching.
Without forgiveness, they would face a debt burden that, for many, would be hard to bear in a struggling economy.

 

Low visibility: Uncertainty stemming from the coronavirus pandemic has caused many companies to abandon earnings forecasts they previously issued for this year. Among those S&P 500 companies that discussed their full-year outlooks during the quarterly earnings season that’s now winding down, nearly two-thirds had withdrawn their previous guidance as of May 21, according to FactSet.

China’s uncertainty: China’s government is declining to set an economic growth target for 2020—the first year that it’s failed to offer GDP guidance since it began setting annual targets in 1994. Friday’s move comes after China recently reported that first-quarter GDP shrank by 6.8% as coronavirus-rel

Japan’s struggle: Japan’s government started the week with an announcement that the world’s third-largest economy has fallen into a recession, with GDP shrinking at an annualized rate of 3.4% in this year’s first quarter. On Friday, Japan’s central bank announced a program to support $700 billion in business financing to help offset the impact of coronavirus-related restrictions.ated restrictions weighed on the world’s second-largest economy.

Upcoming Reports

Thursday:
First-quarter GDP, second estimate, U.S. Bureau of Economic Analysis
Weekly unemployment claims, U.S. Department of Labor

Friday:
Personal income and consumer spending, U.S. Bureau of Economic Analysis

COVID Updates:
Required Minimum Distributions have been waived for 2020
Tax deadline extended to July 15th (Federal & State)
IRS Stimulus check: https://www.irs.gov/coronavirus/get-my-payment

The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investments.

https://www.marketwatch.com/story/dow-futures-jump-over-300-points-as-stocks-look-to-extend-rally-2020-05-27?mod=home-page
https://www.foxbusiness.com/markets/congress-shifts-coronavirus-focus-to-small-business-aid
https://www.businessinsider.com/personal-finance/state-income-tax-deadline-2020-new-due-dates-2020-4
https://www.irs.gov/coronavirus/get-my-payment