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Commentary provided by John Packs, Senior Investment Officer, AIG Retirement Services

Weekly Market Performance Snapshot (Week ending August 7, 2020)

  • Dow Jones Industrial Average®: +3.8%
  • S&P 500® Index: +2.4%
  • NASDAQ Composite® Index: +2.5%
  • Russell 2000® Index: +6.0%
  • 10-year U.S. Treasury note yield: 0.561%, up 24 basis points from 0.537% on July 31
  • Best-performing S&P 500 sector this week: Industrials, +4.8%
  • Weakest-performing S&P 500 sector this week: Real Estate, +0.6%

Equities Keep Climbing

Despite the pandemic and the resulting severe economic contraction, major indices continue to move higher. The NASDAQ Composite reached a new high this week, closing above the 11,000 mark for the first time. The index has doubled since the beginning of 2017. The S&P 500 is now just 1% below the all-time closing high it reached in February.

  • Stocks were helped by positive jobs data. July’s U.S. employment report, released Friday, showed a gain of nearly 1.8 million jobs during the month. The unemployment rate fell to 10.2% from 11.1%. The economy has added back 9.3 million jobs since losing more than 22 million jobs in March and April. New claims for unemployment benefits also fell this week after two weeks of increases.
  • The Institute for Supply Management’s measure of U.S. manufacturing activity registered 54.2 for July, its highest level since March 2019. Readings above 50 indicate an expanding economy.
  • While the jobs and manufacturing data may ease some concerns about the resilience of the economic recovery amid rising virus cases, markets are still eagerly awaiting details on the next round of economic relief and stimulus from Washington. The amount of aid directed to individuals, states, and schools will influence consumer spending and employment levels in coming months.
  • Airline stocks rose on news reports that the White House and members of Congress are in favor of distributing another $25 billion in aid to airlines, in exchange for agreements to maintain employment levels into 2021.

Bond Yields Stay Historically Low

The yield on the 10-year Treasury note continued to hover above 0.5%, as concerns about the economy drove investors to this “safe haven” asset. Purchases by the U.S. Federal Reserve have also pushed Treasury rates lower (yields move down as rising demand pushes Treasury prices up). Yields are historically low even as the U.S. government issues trillions of dollars in debt to pay for economic relief and stimulus.

  • The search for predictable income has also benefited highly rated issuers of corporate debt. Alphabet, the parent company of Google, sold 10-year debt this week with an interest rate of just 1.1%. The company issued 40-year bonds at a 2.25% rate.
  • Low interest rates have many investors searching beyond bonds for income. The dividend yield on the S&P 500 index is currently 2.3%—more than four times the rate of return on the 10-year Treasury. As a result, some investors may be taking on the additional potential risk that comes with equities in order to generate income.
  • Gold and silver prices have risen substantially, as the value of the dollar has fallen and some investors seek inflation protection amid record U.S. debt issuance. Year to date, gold is up more than 31% and silver is up more than 50%.
  • Speak with a financial professional about building an income-generating portfolio that is appropriate to your tolerance for risk.

U.S.-China Tensions Continue to Simmer

The U.S. ratcheted up its response to concerns about the Chinese government’s access to American data. On Friday, President Trump issued executive orders banning people in the U.S. or under U.S. jurisdiction from conducting transactions with the owners of the Chinese apps WeChat (owned by Tencent Holdings) and TikTok (owned by ByteDance).

  • The U.S. government still has to determine what constitutes a transaction for purposes of the executive orders, which take effect in 45 days. U.S. businesses that market products or take payments via the apps could be affected, depending on how the orders are implemented.
  • The executive orders come after months of growing government concerns about the TikTok app’s access to U.S. user data. Microsoft is in talks to acquire TikTok’s operations in the U.S. and three other western countries. The deal has not been finalized.
  • The State Department also announced a new initiative aimed at restricting certain Chinese companies’ access to the Apple and Google app stores, and curtailing use of cloud services run by Chinese companies. The proposal is advisory, not mandatory, but Chinese companies including Huawei, Alibaba, and Tencent could be affected.