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Tom L. Stringfellow, CFA®, CFP®, CPA, CIC | June 29 , 2020

President and Chief Investment Officer

The following has been compiled from information and comments provided by the investment professionals of Frost Investment Advisors:

Rising Case Count and Renewed Worries…

Spiking COVID-19 caseloads reversed momentum last week, and Friday closed out the week with the major U.S. and overseas equities markets selling off.  There were no real safe harbors, with small, mid and large company stocks selling off, just as the growth and value names did.  Sectors posting the worst performance were energy, financials and communication services.  Overseas, one of the few bright spots was China, the first country to turn the corner in new cases and recoveries.  Apart from the equity markets, gold offered some respite for investors.  The fixed income markets did also, with 20-year Treasurys catching most of the bid.  Despite last week’s sell-off, it is still worth noting that since the March 23rd lows most of the global benchmarks are sitting with 30-plus percent returns.

Last week’s market reflected rising investor concern as cases increased in Texas, Florida, Arizona, and California, potentially jeopardizing near-term recovery hopes.   Concerns are warranted, given that quarantine measures are being reinstated across the problem states, but it’s too early to conclude that longer-term economic potential has been upended.  Ongoing worries continue to include massive layoffs following the pandemic’s spread and the less-than-desired job recovery.  The good news is that continuing claims have declined four out of the last five weeks to 19.5 million.  Even so, initial jobless claims are still posting higher than the market expected, while unemployment levels continue to hold at more than 13 percent.

There was some good news on the manufacturing front, as May’s durable goods orders ticked up by 15.8 percent for the month, with auto manufacturing rebounding by 27.5 percent and non-defense capital goods orders moving positive by 2.3 percent.  Meanwhile, consumer spending was up by 8.2 percent in May.  A number of the Fed districts also posted positive news.  The Richmond Fed Manufacturing Index was flat (no net new contraction) with new expectations posting their highest uptick since July 2017.  The Chicago Fed’s National Activity Index likewise moved into positive territory across a weighted average of 85 indicators for May.  And overseas the outlook is also improving in Europe, as business conditions in Germany and France are pushing multi-month highs.  One negative news item was that the final estimate for Q1 GDP here at home posted a rate of negative 5 percent. The reasons why are well understood, and expectations are for further deterioration for most of the second quarter.

Obstacles ahead may weigh on market sentiment, including the near-term impact of select states affected by COVID-19 setbacks.   One of the worst sector downturns last week was the financials sector, as the Federal Reserve released its Dodd-Frank stress test to monitor the industry’s ability to maintain acceptable capital levels.  Given the continuing pandemic and its impact, regulators added restrictions for the banking industry, requiring banks to suspend any buybacks while holding dividend payments to their current levels at least through Q3.  Over the next few weeks, these regulatory changes may weigh on investor nerves. 

Other concerns in the near future will be the possibility that the still-positive trending business sentiment might be derailed by the turnaround in COVID-19 cases, as well as a reversal in the slow decline we’re seeing in continuing unemployment claims.  As for investor resolve today, more positive news—vaccine, economic, jobs, monetary and fiscal policies and more—is critical to continue the market upturn.  For now, average investors are still voting with their investment accounts, as the Investment Company Institute data continues to note large outflows from equities into money market funds and bonds.

There will not be an edition of News and Views over the July 4th weekend.

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