It has been another week with no resolution in congressional stimulus discussions. The positive economic numbers we see may have led to a false assumption the economy is on better footing than it really is.
Equities suffered three days of big losses but were bookmarked by a bounce to end the week. The sell-off lacked an easy scapegoat, but a lot of chatter in the financial markets pinned the blame on excessive option buying in the technology sector, that then gave way to an air pocket once the activity dried up.
The preliminary GDP numbers for the second quarter were released this week. The decline in the quarter was adjusted from 32.9% to 31.7%. A 1% adjustment in GDP growth used to cause panic among economists.
Equities posted strong moves on the week led by large caps and technology. The NASDAQ advanced 4.7% on the week, whereas the small cap Russell 2000 was down 0.7%. Emerging market equities advanced 1.8%.
There was a sharp increase in productivity in the second quarter of 2020. Nonfarm business sector labor productivity increased by 7.3%. However, this number masks some underlying economic weaknesses. Productivity is calculated by dividing output by the number of hours worked.
Equities advanced on the week as small caps and financials lead the way. The rotation out of high-growth stocks again caused a notable performance divergence across the equity landscape. Some of the well-known momentum stocks have suffered sizeable drawdowns over the past couple of weeks.
There’s something I’ve been wondering lately. Why haven’t hedge funds performed in line with expectations? For example, when the going got tough for the equity markets earlier this year they were a disappointment, as evidenced by the Barclays Hedge Fund Index return of -2.61% for the first six months of 2020.
Preliminary U.S. GDP numbers for the second quarter were released this week. U.S GDP declined by 32.9%. This officially puts the United States in a recession if you go by the 1974 rule of thumb definition established by former Bureau of Labor Commissioner, Julius Shiskin.
Equities were off slightly for the week as investors pulled back ahead of a newsy week highlighted by several earnings announcements, the Federal Open Market Committee (FOMC) meeting and uncertainty on fiscal stimulus extensions.
U.S. companies continued announcing second quarter earnings this week. With 15% of S&P 500 companies reporting, earnings and sales are better than expected. Earnings growth is 14.8% higher than estimated.