Economic and market indicators were all over the place this week, as the U.S. market seems to be at somewhat of a crossroads.
Here’s how money moved around the world this week, according to Bank of America Global Research:
- Stocks: +$4.8 billion
- Equity ETFs: +9.8 billion
- Equity Mutual Funds: -$5 billion (that’s an outflow)
- Bonds: +$9.3 billion
- Investment Grade Bonds: +$7.9 billion
- High Yield Bonds: +$1.5 billion
- Treasury Bonds: -$3 billion (an outflow)
- Cash: -$77 billion (an outflow)
Investors have been largely drawing on their cash of late, which they had built up during the initial wave of coronavirus infections and as the global equity market went into a bear market. In the first leg of the relief rally, as stimulus measures and state reopenings emerged, investors were slowly buying stocks. But since June 8, as cyclical value stocks have largely sold off in the face of virus-related and economic headwinds, investors have continued to draw on their cash to buy a variety of assets, some safer, some riskier.
This past week, the S&P 500 rose about 1.2%, while the MSCI World Index also rose 1.2%. Gains were especially strong in Europe, with the Euro Stoxx 600 up 1.6%, as fiscal stimulus seems to be on the way. The iShares iBoxx $ High Yield Corporate Bond ETF (HYG) - Get iShares iBoxx $ High Yield Corporate Bond ETF Report rose a bit more than 1%, as credit spreads int the U.S. are still historically a touch high, at above 5.5%. These bonds are risk assets but provide a level of protection equities don’t. While capital flowed out of the ultra-safe 10-Year Treasury bond, the yield still slipped 2 basis points on the week to 0.62%.
U.S. Banks underperformed the equity rally, another slightly risk-off signal, as the Invesco KBW Bank ETF KBWB rose 0.2%. Major banks like Goldman Sachs (GS) - Get Goldman Sachs Group, Inc. (GS) Report, JPMorgan Chase & Co. (JPM) - Get JPMorgan Chase & Co. (JPM) Report, Citigroup (C) - Get Citigroup Inc. Report and Bank of America (BAC) - Get Bank of America Corp Report beat earnings estimates on the strength of more volatile businesses like trading and investment banking. But net interest margins, which show profitability on loans after interest expense and total net interest income dollars were way down year-over-year, as economic demand and interest rates have plummeted. From the major banks reporting earnings this week, loan loss provisions, the amount of cash banks set aside to absorb potential credit losses, largely came in higher than expected, totaling more than $30 billion.
So while retail sales data from June showed a 7% year-over-year increase, on the back of heavy fiscal stimulus, the positive backward-looking data are facing headwinds. Virus infections keep rising in the U.S. States are pausing reopening plans. Rates cannot fall much lower. More fiscal stimulus is needed.
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