Gray Economic Outlook from Fed and Coronavirus Concerns Contribute to Market Downturn

Market Recap Week Ending 6/12/20

VIX, a measure of market volatility, increased 47% last week as investors assessed news that Coronavirus infections had spiked in several states and heard a gray economic outlook from Fed President, Jerome Powell.  The S&P 500 turned positive for the year for the first time since March but ended the week down 4.8%.  The Dow fell 5.6% on the week; the NASDAQ eclipsed 10,000 but subsequently gave up that level losing 2.3%.  The Russell 2000 was hit the hardest, losing 7.9% for the week.  This week’s equity market performance was the worst since March.   The US Treasury curve flattened this week with longer-tenured bonds outperforming shorter duration paper.  The 2-year note yield lost three basis points to close at 0.18% while the 10-year bond yield fell 20 basis points to close at 0.70%.  Gold was bid higher, gaining $53.80 on the week to close at $1737.10 an Oz.  Oil declined 8.3% to close at $36.24 a barrel.  Some of the sell-off can be attributed to concern regarding the short extension of oil production curbs that was announced by OPEC early in the week.  There were no changes to our models last week. 

Early in the week, the S&P 500 went positive on the year and was up over 48% from the low put in on March 23rd.  The notion that the market has gone too far too fast set in this week.  News of spikes in Coronavirus infections in 20 states and a grim outlook from the Federal Reserve on Wednesday perhaps acted as a catalyst. Still, in reality, both have been discussed and debated by investors for quite some time.  The Federal Reserve kept rates unchanged, and their dot plot indicated that there would be no rate hikes for the next couple of years.  The central bank sees a contraction of 6.5% in GDP for 2020 and sees a rebound of 5% in 2021. The market appears to have been overheated, evidenced by the speculative action seen in bankrupt issues such has Hertz.  On Friday, there was news that Hertz management had sought permission from their bankruptcy Judge to do a one billion dollar equity capital raised- crazy!  Cyclical issues that have had a fantastic move over the last few weeks took the brunt of this week’s sell-off.  Keep an eye on the 3000 level of the S&P 500; it is a critical technical level that now offers support for the market- a breach below that level sustained for five or so sessions would indicate the markets could continue to sell-off.