Your Weekly Update for Monday, May 4, 2020
Beacon Rock Wealth Advisors is a financial planning and registered investment advisory firm in Camas, Washington. We are always available to answer your finance questions. Give us a call at (800) 562-7096 or send an email to[email protected].
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Mike Elerath
CERTIFIED FINANCIAL PLANNERTM
CERTIFIED IN LONG-TERM CARE
NATIONAL SOCIAL SECURITY ADVISOR
Bill Roller
NMLS #107972
CHARTERED FINANCIAL ANALYST
CERTIFIED FINANCIAL PLANNERTM
CHARTERED MARKET TECHNICIAN
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Summary
It was a slightly down week on Wall Street last week. The Dow Jones Industrial Average fell 0.22% to 23,723.69. The S&P500 fell 0.21% to 2,830.71, while the Nasdaq Composite finished down 0.34% to 8.604.95. The annual yield on the 30-year Treasury rose 10 basis points to 1.278%.
Data for the week included lackluster results for Q1 economic growth, personal income and spending, manufacturing, and jobless claims. These were all as expected due to the rapid business shutdowns since March.
U.S. and foreign equity markets were mixed last week as sentiment wavered back and forth surrounding virus and economic news. Bonds were little changed on net, with central bank policy consistently accommodative. Commodities rose as crude oil prices rebounded back from dislocations the prior week.
Economic Notes
(-) The advance release of U.S. GDP for the first quarter showed a decline of -4.8%, a bit worse than the -4.0% forecast. Despite signs of decent growth in Jan. and Feb., the spread of Covid and government-mandated lockdowns starting in mid-March quickly âturned offâ large chunks of the economyâan unprecedented action in modern times. The details are negative throughout the report, with personal consumption and business fixed investment leading the decline, down -8% and -9%, respectively, while inventories and homebuilding contributed a bit on the positive side. The more extreme the change in growth, the greater the room for error, though, so this first estimate may be subject to large edits by next monthâs release. The core PCE inflation index rose at a 1.8% annualized rate for the quarter, which was just a tick above expectations.
Expectations for Q2 GDP are naturally terribleâthe worst since the Great Depression. Economist estimates range in severity from an annualized -20% to -30%, with a lot of leeway built in based on how quickly particular regions emerge from lockdown. However, the far more populated coastal states are expected to remain closed longer than the less-affected heartland. The real-time New York Fed Nowcast has opened with an estimate of -9%, while the Atlanta Fed GDPNow is calling for -17%. Expecting too much precision here is probably not worthwhile.
(-) Personal income fell -2.0% in March, which was about three-tenths beyond expectations. In keeping with lockdowns, personal spending fell -7.5%, which was a bit further than the -5.1% expected, and the worst single-month result since the 1950s when the data began being measured. Combining the two, the personal savings rate rose by 5.1% to 13.1%. The PCE price index fell by -0.3% on a headline level and -0.1% for core. This took the year-over-year headline and core inflation rates to 1.3% and 1.7%, respectivelyânot surprising considering the sharp drop in energy prices and falling demand.
(-) The ISM Manufacturing Index for April fell by -7.6 to a level of 41.5, which was actually better than the forecasted level of 36.0, but an 11-year low. However, the report was thoroughly week, with sharp drops in production, new orders, and employment. Supplier deliveries, however, rose to the highest levels since the mid-1970s due to supply backlogs. This poor showing was no surprise, and is likely to continue along with extreme shutdowns of activity.
(+) Construction spending rose 0.9% in March, which far surpassed the median forecast of a -3.5% decline, although this included revisions downward for several prior months. Private residential spending rose over 2% during the month, to lead, while public non-residential nearly reached this level.
(-) The advance goods trade balance report for March showed an increase in the trade deficit by -$4.3 bil. to -$64.2 bil., wider than the median forecast calling for -$55.0 bil. Overall trade volumes fell, as imports declined by -$5 bil and exports by -$9 bil.
(+) In what is now considered ancient data, the S&P/Case-Shiller home price index rose 0.5% in February, surpassing the median forecast by a tenth of a percent. Prices increased in all 20 cities in the index, led by Minneapolis, Tampa, and Cleveland, all of which gained a percent or more. Year-over-year, the pace of change rose by almost a half-percent to 3.5%, which remains respectable, but below the 5-6% appreciation levels weâve become used to in recent years.
(-) Pending home sales fell by a dramatic -20.8% in March, surpassing the -13.6% decline expected by consensus forecast. Sales fell in all regions, with the West and Midwest hit hardest, down over -20% each. Year-over-year, pending sales are down -15% from a year ago, which is not surprising. Pending sales tend to forecast existing home sales a few months beyond; the virus lockdown activity is sure to suppress transactions of all types.
(-) Consumer confidence for April fell by a dramatic -31.9 points to 86.9, which nearly matched consensus expectations calling for an 87 reading. Consumer assessments of present conditions plummeted by -90 points, while expectations for the future rose by 7 points. The labor differential deteriorated by -43 points, the largest monthly margin on record. As expected by early estimates, the April shutdown of the U.S. economy played havoc on consumer mentality; however, hopes for future improvement remain high, which is a possible silver lining.
(-) Initial jobless claims for the Apr. 25 ending week fell by 603k to 3.839 mil., but still above expectations for a 3.500 mil. reading. Continuing claims for the Apr. 18 week rose by 2.174 mil. to 17.992 mil., which was actually below the expected level of 19.476 mil. The shift from initial to continuing claims continues, with the levels largest based on the speed of processing by states, which has seen a few hiccups. Claims now represent a not insignificant part of the American workforce, although the initial claims for new lockdowns could be troughing for now.
Market Notes
| Period ending 5/1/2020 | 1 Week (%) | YTD (%) |
| DJIA | -0.22 | -16.26 |
| S&P 500 | -0.19 | -11.83 |
| Russell 2000 | 2.24 | -24.10 |
| MSCI-EAFE | 3.07 | -18.92 |
| MSCI-EM | 4.25 | -17.75 |
| BBgBarc U.S. Aggregate | -0.12 | 4.86 |
| U.S. Treasury Yields | 3 Mo. | 2 Yr. | 5 Yr. | 10 Yr. | 30 Yr. |
| 12/31/2019 | 1.55 | 1.58 | 1.69 | 1.92 | 2.39 |
| 4/24/2020 | 0.12 | 0.22 | 0.36 | 0.60 | 1.17 |
| 5/1/2020 | 0.12 | 0.20 | 0.36 | 0.64 | 1.27 |
U.S. stocks were mixed last week on net. Markets gained strongly on Wed. with widespread trials for a Covid therapy (Remdesivir, developed by Gilead) showing more concrete effectiveness, to back up anecdotal claims from recent weeks in the field. However, by Friday, negative economic and earnings reports again weighed again on markets. Are-escalation of tensions with China, including a possible resumption of tariffs and other punitive measures, were alluded to by the administration in retaliation for lack of early information sharing about Covid. A groundswell of resentment toward China has taken hold in both political parties, as well as in the corporate realm, so is an important factor to watch in coming months.
By sector, energy gained over 3% with a rebound in oil pricesâwith production cuts helping supply, and reports of some repair in global demandâfollowed by materials and communications. Defensive stocks in utilities, healthcare, and consumer staples lagged with the only losses for the week. A variety of firms, including those holding up seemingly better in high tech, have offered downbeat stories due to Covid impacts, and have pledged to not provide any 2020 earnings guidance due to the lack of clarity available. Interestingly, under some pressure from the public and regulators about business practices, pledged to spend all quarterly profits on Covid efforts.
Foreign stocks were also mixed, with Europe gaining over two percent in local terms, followed by minimal gains in Japan. As most other regions, sentiment in Europe has been driven by increased pressure to reopen several economies, in addition to ECB plans for additional bond market purchases and business liquidity provisions. Emerging markets gained due to strength from commodity exporters.
U.S. bonds lost ground slightly, as interest rates ticked higher across the 10-year and 30-year parts of the yield curve. Investment-grade credit outperformed government slightly, while high yield earned positive returns outright for the week. Foreign bonds gained in both developed and emerging markets, as the U.S. dollar fell by over a percent last week.
Commodities were mixed to higher as a sharp rebound in energy offset declines in metals. In percentage terms, the price change of West Texas crude oil rose into the double-digits, from under $17 to $20/barrel, back to somewhat ânormalâ trading following the unique futures expiration issues last week when oil fell into negative territory. Despite production cuts, supply remains an issue, however. This has distorted the price of West Texas crude (which is stored at the delivery point in Cushing, OK) relative to the Brent crude contract to which most European oil is peggedâwhich has fluctuated less wildly.
Mortgage Rates
âThe size and depth of the secondary mortgage market is helping to keep rates at record lows. These low rates are driving higher refinance activity and have modestly helped improve purchase demand from their extremely low levels in mid-April,â said Sam Khater, Freddie Macâs Chief Economist. âWhile many people are benefitting from low mortgage rates, itâs important to remember that not all people are able to take advantage of them given the current pandemic.â
30-year fixed-rate mortgage averaged 3.23% with an average 0.7 point for the week ending April 30, 2020, down from last week when it averaged 3.33%. A year ago at this time, the 30-year FRM averaged 4.14%.
The 15-year fixed-rate mortgage averaged 2.77% with an average 0.6 point, down from last week when it averaged 2.86%. A year ago at this time, the 15-year FRM averaged 3.60%.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.14% with an average 0.4 point, down from last week when it averaged 3.28%. A year ago at this time, the 5-year ARM averaged 3.68%.
Average commitment rates should be reported along with average fees and points to reflect the total upfront cost of obtaining the mortgage. Visit the following link for the Definitions. Borrowers may still pay closing costs which are not included in the survey.
Through our relationship with Prestige Home Mortgage in Vancouver, Washington we originate residential and reverse mortgages. Check us out at https://beaconrwa.com and our affiliated websites at https://reverse-mortgages.us and https://socialsecurityquestionsanswered4u.com.
Sources: Ryan Long, CFA, FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Citigroup, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Marketfield Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, PIMCO, Standard & Poorâs, StockCharts.com, The Conference Board, Thomson Reuters, T. Rowe Price, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wall Street Journal, The Washington Post. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. FocusPoint Solutions, Inc. is a registered investment advisor.
Notes key: (+) positive/encouraging development, (0) neutral/inconclusive/no net effect, (-) negative/discouraging development.