ND&S Weekly Commentary 6.15.20 – Volatility

June 15, 2020

Last week US stocks suffered their worst week since March. Investors were rattled over fears of rising COVID-19 infections and very dovish comments by the Federal Reserve, “the Fed,” forecasting a weaker than expected economy. On Thursday, the Dow Jones Industrials (DJIA) fell more than 1,800 points representing a 6.9% drop. Stocks were unable to sustain their bullish pace for the last 11 weeks during which they gained over 44%.

For the week, the DJIA slid 5.6%, the S&P 500 declined 4.8% and the tech heavy Nasdaq was down 2.3%. Foreign markets also weakened with Developed (MSCI EAFE) and Developing International (MSCI EM) equities down 4.2% and 1.5% respectively. The Cboe Volatility Index (VIX) commonly referred to as Wall Street’s” fear gauge,” gained 44% for the week. Bankrupt companies like Hertz Holdings went wild, rocketing 115% on Monday, dropping 24% on Tuesday and 18% on Thursday. Traders and speculators are making a spectacle of themselves and stirring up tremendous volatility.

On Wednesday, Federal Reserve Chairman, Jerome Powell, stated that the economic recovery is going to be slower and more painful than many had hoped. Powell said the Fed has no plans to raise short-term rates through 2022 and would continue adding liquidity to the credit markets. The 10 year US Treasury yield ended the week at 0.71%, a 0.2% weekly decline. The Fed has been buying bonds for 10 straight weeks including high yield corporates and municipals which stabilized credit markets and enriched risky bond holders. In fact, high yield bonds have gained more than 21% since bottoming in late March. There’s an expression that you should never fight the Fed.

In May, the US surprisingly added 2.5 million jobs, far exceeding the consensus expectations of a 7.5 million job loss – though the added jobs only represented 11% of the 22 million job lost in the preceding two months. The manufacturing and services activity declined but showed improvement over April’s reports. The price of oil once again revealed its volatility on rising inventories declining 7.8% to $ 36.45 price per barrel.

With all of this uncertainty, let us not forget what boosted the market the last several weeks. The Fed’s massive liquidity stimulus, improving economic data, our adjusting to life and business in the new coronavirus world and investor’s fear of missing out have all contributed to the boost. Moreover, there was encouraging news by Eli Lilly and Regeneron Pharmaceuticals on their coronavirus treatments. Moderna also announced it will begin a Phase 3 study of its virus vaccine next month.

This week retail sales will be released on Tuesday, housing starts and building permits on Wednesday and the leading indicator on Thursday. Markets will continue to be quite volatile and we recommend investors try and remain patient and stay close to their long-term asset allocation targets.

Please stay safe!

“You pay a very high price for a cheery consensus. It won’t be the economy that will do in investors; it will be themselves. Uncertainty is actually the friend of the buyer of long-term values.” —-Warren Buffet