Market Commentary - July 10th 2020
US markets ripped ahead in the second quarter of the year, with the S&P 500 enjoying its best quarterly performance since 1998; gaining 21% to stand only 4% lower for the year. In sterling terms world equities rallied 20.3% in the second quarter to finish 0.4% lower for the first half of the year.
180 companies in the S&P 500 have withdrawn earnings guidance for 2020, with only 49 having issued guidance for the second quarter. Despite this negative outlook, the US led the way; buoyed by optimism accompanying economic reopening, central bank liquidity and news on potential vaccines. The UK, however, made relative lows as the FTSE 100 finished the second quarter down 17%, juxtaposing gold’s 17% rise in US$ terms to make a 7-year high.
Central bankers in the UK are wrestling with the desire to support the economy and protect jobs, whilst staying true to the Band of England’s mandate of keeping inflation under control. Both the BoE’s Governor and Chief Economist acknowledge the rising risk of a “dependency culture”, which depends upon central banks creating money for the functioning of financial markets and the economy.
Improving US employment data has helped buoy markets; in June 4.8m net job gains served to beat analysts’ expectations by 1.6m, whilst May’s figure was simultaneously revised higher. Aided by the modest recovery in the oil price and easing lockdown measures, US breakeven inflation expectations have picked up somewhat. In comparison, the outlook for UK inflation remains much higher, with a far smaller change this year, with expectations in line with the average since 1992 of 3.1%.
Returning to central banks, the Federal Reserve has been vocal in its maintenance of interest rates until the end of 2022. By holding rates so low for so long the Federal Reserve is providing a huge backstop to markets. This, combined with purchases of almost $20bn worth of Treasuries per week, provides unprecedented liquidity, allowing companies to borrow cheaply and for governments to run large deficits.
Within the political sphere, it will be in the interest of the incumbent president to ensure markets are resilient. The pendulum of favour has swung away from Trump towards Biden, with many surprised at the speed of the transition. The Democrats finished off the month of June by publishing their climate action plan to ensure the country reaches net-zero emissions by 2050. This is a key differentiator between parties and will continue to be a focus as the world looks to decarbonise. Market participants will also pay attention to potential tax and regulatory changes that could accompany a Democratic presidency.
“We’ve seen two years’ worth of digital transformation in two months.” Satya Nadella, Microsoft CEO
The surge in technology stocks has been quite extraordinary. For huge swathes of mankind worldwide to be simultaneously unable to conduct their lives as normal, it has forced us to incorporate technologies and practices where only a few companies offer solutions. Unsurprisingly, this has benefitted a small number of companies, and the momentum driving these juggernauts doesn’t seem to be slowing.
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