Equities rallied for the third week in a row, building on their strong performance in May. Despite headline-grabbing S&P 500 performance — which is now down only about 1% on the year — international equities led the charge higher last week [Figure 1]. Emerging markets returned 7.8% (MXEF), but international developed markets weren’t far behind (MXEA +7.1%). Domestic equities lagged, up “only” 5.0% last week (SPX).
Value, small caps lead as momentum rolls over
The potential for a rotation in market leadership that we’ve been flagging looks like it’s finally here. Optimism around a faster restart is causing investors to bottom fish in the more beaten down areas of the market. Domestically, value led growth last week by over 300 basis points (bps) and small-caps (RUT) beat large-caps (SPX) by a similar margin [Figure 1].
Given the large year-to-date (YTD) gaps in these market segments [Figure 2], this price action can continue. The tech-heavy NASDAQ lagged as well, but closed the week up 10% on the year and just a hair away from its all-time high set in February.
A “less bad than we thought” rally
While it may seem hard to believe that equities are higher in a pro-cyclical fashion amidst scenes of mass protests all over the country, markets don’t make moral judgments. Rather, it appears markets have realized that the appetite to remain in lockdown is now gone on both sides of the political aisle. Couple that realization with improving economic data and extremely supportive monetary and fiscal policy — and you get a “things are less bad than we thought” rally in markets.
Will there be a spike in coronavirus cases from the protests? We’ll know in a few weeks, but for now the market is comfortable with the plateau in new cases. Increasingly, based on high frequency data, consumers appear to be as well.
Jobs report stuns to the upside
Speaking of economic data, the jobs report was a true shocker, showing the economy actually gained 2.5 million net jobs in May. Not one of 78 economists surveyed by Bloomberg expected a gain in jobs, and while there were undoubtedly some measurement errors, it is an unabashedly strong number. The only logical conclusion we can draw from it is that more people are coming back to work than are losing their jobs. PMI readings also improved across the globe last week, and while they remain in contraction territory, the snap back has been faster than many anticipated.
Good week for fixed income markets
Last week was a big one in bond markets too, with the 10-year finally breaking out of the 0.6% to 0.8% range it has held since late March. By recent standards, the moves were massive last week (2yr +5 bps, 10yr +24 bps, 30yr +26 bps). And the 5s30s yield curve, now the one to watch since the 2-year is pegged at the Fed Funds target, steepened to its highest level in 3 years [Figure 3].
Lagarde’s “whatever it takes” moment?
The European Central Bank (ECB) added to the optimistic tone of markets last week by exceeding already lofty expectations and expanding their asset purchase program in size, duration, and reinvestment details. Some are calling this ECB President Lagarde’s “whatever it takes” moment and markets are responding accordingly. The Euro is rallying along with EU equities and the very beaten-down EU banks. And spreads on government debt outside of the core are tightening.
It’s worth remembering that when Mario Draghi uttered those famous words in Portugal in 2012, the Euro appreciated by about 15% over the next year and a half — and that was without any help on the fiscal side. Given the EU-wide fiscal package proposed with France’s and Germany’s backing two weeks ago, Europe is now 2 for 2 against years of investor negativity. We think this has legs.
FOMC to release rate decision (spoiler alert)
This week it is the Fed’s turn, with the FOMC releasing their rate decision on Wednesday. Fed Funds rates aren’t moving, but we’ll get a fresh set of economic and interest rate projections and likely stronger forward guidance on interest rates. Spoiler alert: interest rates aren’t going higher anytime soon. It will likely be years, not months, before we see a rate hike.
What to watch now
Outside of the Fed news on Wednesday, it’s a relatively slow week. Here’s what we’ll be watching.
NFIB Small Business Optimism Survey
On Tuesday, the report is expected to show a rebound in May.
Flash Consumer Confidence
On Friday, expect to see the University of Michigan Consumer Sentiment Index flash survey tick higher for June.
We continue to watch high-frequency data, e.g., OpenTable reservations, to confirm reopening momentum and progress.
While the market isn’t hyper-focused on the virus right now, we continue to watch for a plateau in new cases or only a slight increase following the restart and the nationwide protests taking place.
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