Concerns have been increasing, as have the markets. When will this new correlation diverge?
Monday
Markets opened with a bang as they were off 2% at the open! Concern about a second wave of the virus caused markets to skid into the week. Sentiment lifted later in the day as the Federal Reserve announced they were going to increase corporate bond purchases. This news carried a rally from -2% to almost 1% positive.
Tuesday
Retail sales impressed dramatically. Initially expected to grow by 8%, they grew by 17.7%. This signaled a sharp bounce back in economic activity in May. Markets welcomed this news as they opened up 2.5% and closed up 1.9%. The S&P 500 really sustained the gains throughout the day.
Wednesday
Markets were mixed throughout the day on Wednesday. They opened strong as the rally continued, then waivered on risks associated with relations with China. Additionally, the increased closing of Beijing as they fight a cluster of COVID-19 cases caused markets to faulter late.
Thursday
Much like Wednesday markets struggled to find a direction, Thursday’s opened in the red, responding to unemployment data which showed persistent job losses at 1.5M. Markets drifted back to even later in the day, led by communications, technology, and staples. This gives a clear indication of a continued view towards stay at home orders. Contrary to that idea, energy was the best performing sector of the day. This came as regional manufacturing data outperformed expectations.
Friday
Markets opened the day on a positive note as optimism over economic re-opening seemed to still be carrying weight. That all evaporated as we moved through the day. Apple announced they were planning to close a number of stores as infection rates have started to increase again. Those closures caused markets to take pause as odds of a potential second shutdown increased.
Conclusion
The concerns this week resulted in markets rising nearly 2%… When the Fed is buying, you buy, never bet against the Fed… By and large, this is exactly what investors have done. That being said, high yield bonds have shown demand that is unlike recession territory. This implies that defaults are unlikely to materialize even though we are in a recession. Those defaults should materialize as this recession wears on, so proceed with caution.
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