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Commentary provided by John Packs, Senior Investment Officer, AIG Retirement Services

Highlights

  • Markets were positive for the week after trading up and down on health news and U.S. Federal Reserve announcements. The NASDAQ Composite® Index rose all five days.
  • Renewed health concerns were prompted by rising coronavirus cases in China and a resurgence in confirmed cases and hospitalizations in the U.S. Optimistic results from a COVID-19 treatment trial in Britain pushed markets higher early in the week.
  • Federal Reserve Chairman Jerome Powell continued to signal caution about the pace of economic recovery in testimony before Congress. The Fed also announced direct purchases of corporate bonds.

Markets Zig-Zag Through the Week and End in Positive Territory

Equity markets traded up and down through the week, responding largely to news on the health front and from the Fed. The S&P 500® Index finished up 1.8% for the week. The NASDAQ Composite gained ground every day and finished up 3.7%. The Russell 2000® Index of small-cap stocks rose 2.2% for the week. U.S. Treasury bond yields ended the week about where they started.

  • The surprisingly positive May retail sales figure—up nearly 18% from April—pushed stocks higher on Tuesday. This rise was likely boosted by government stimulus payments. Future monthly gains may depend more on how quickly employment and other economic fundamentals improve.
  • Continued volatility and the uncertain pace of economic recovery have many questioning if the market is appropriately valued and disagreeing over the direction in which it’s headed. Bank of America's June Global Fund Manager survey found that 78% of fund managers believe that the stock market is "overvalued." That’s the highest level since 1998. The survey also found that 37% of respondents say we’re in a bull market (in which stocks rise at least 20% from the previous lows), while 53% say we’re in a bear market rally (in which stocks rise temporarily amid a continuing market decline).
  • The only certainty is uncertainty for the foreseeable future, and uncertainty will drive volatility. Investors should speak with a financial professional about building a portfolio equipped for a variety of financial and economic outcomes.

Health News Pushes Markets Up and Down

As has happened for the past three months, health news moved markets this week, both positively and negatively.

  • On Tuesday, markets reacted well to news out of the UK that Dexamethasone, an inexpensive, widely available steroid, reduced the risk of dying by up to one-third for COVID-19 patients on ventilators.
  • On Friday, markets fell after Apple announced that it will re-close 11 stores in four states—Arizona, Florida, North Carolina, and South Carolina—as coronavirus cases continue to rise in certain areas. Markets will be watching to see if rising cases lead to reduced economic activity.

Federal Reserve Cautions on Employment Outlook

In two days of testimony before the U.S. House and Senate, Federal Reserve Chairman Jerome Powell again cautioned that the return to full economic activity and employment growth is likely to be a prolonged process. He noted, “There are parts of the economy that will struggle to return to their old ways of activity.”

  • Some investors greeted Powell’s comments negatively, as another sign of the disconnect between economic reality and market expectations. Others greeted the comments positively, seeing them as another sign that the Fed will do whatever is necessary to support markets and the economy.
  • Adding credibility to Powell’s concerns about the pace of employment recovery, the weekly jobless claims report ticked down only slightly. The number of people still receiving unemployment benefits is around 20.5 million—extending the recent trend of exceptionally high unemployment levels even as state and local economies continue to open further.
  • The Fed also announced that it has started buying new and existing corporate bonds from companies that were rated investment grade as of March 22. This action builds on the Fed’s ongoing purchases of exchange-traded bond funds (bond ETFs), which started in May. The Fed’s original announcement of bond purchases in late March is credited with adding stability to corporate bond markets.