Last Week’s Markets in Review: Manufacturing on the Rebound

The U.S. equity rally was put on pause last week over concerns of a resurgence in COVID-19 cases in certain geographic areas. In the U.S., the S&P 500 Index fell to a level of 3,009, representing a loss of 2.86%, while the Russell Midcap Index moved 3.31% lower last week. Meanwhile, the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned -2.80% over the week. International equities fared better than their U.S. counterparts, though still gave up ground, as developed and emerging markets returned -1.29% and -0.14%, respectively. Finally, the yield on the 10-year U.S. Treasury followed suit, finishing the week at 0.64%, down 6 basis points from the week prior.

In this week’s update, we’ll take a look at recent economic data releases. Throughout the COVID-19 pandemic, we’ve discussed how forecasting is an almost impossible exercise in the current market environment. Look no further than our previous market update, which highlighted that the number of companies issuing forward-looking guidance has decreased dramatically. So instead, let’s look at a few key macro indicators to help provide guidance on the likely path of the overall economic recovery.

To start, in recent week’s we’ve seen retail sales surprise significantly to the upside. Recognizing that consumption makes up approximately 70% of U.S. gross domestic product (GDP), this release was certainly encouraging and helped give some credence to the stock market rebound that has taken place since March 23, 2020.

We also received updates on another crucial part of the economic recovery equation…manufacturing. The manufacturing sector is a major component of the economy and an important leading indicator of economic activity that provides insight into the supply chain. Last week, U.S. Services and Manufacturing Flash PMIs both hit 4-month highs. The Flash Purchasing Managers Index (PMI) is a forward-looking estimate of the manufacturing and services sectors and provides an advance reading of the final PMI data. By tracking changes in areas such as output, new orders, and prices, it can help indicate the performance and general direction of the private sector. These readings both came in roughly 10 points higher than the previous month and were just below 50. While the readings didn’t quite make it over the 50-mark, which would indicate improving conditions instead of contractionary territory, they weren’t far off and provide additional support for other recent, generally positive economic data. In addition, and more importantly, durable goods orders surged 15.8% in May. This is compared to estimates which were in the +10% range and also represented the largest month-to-month swing in 6 years, following the decline of 18.1% in April.

It’s easy to glaze over the durable goods orders release as it may not be as mainstream as other readings such as GDP, unemployment, and consumer spending, to name a few. Truthfully, its name, durable goods, may not be very apparent to the average retail investor. However, it is quite important, and last week’s reading was very positive. Durable goods orders are a monthly survey conducted by the U.S. Census Bureau and an indicator of manufacturing activity. Durable goods orders refer to those typically more expensive items that are meant to last three or more years. Examples include industrial machinery, computer equipment, and even cars and planes. It’s also important to review the details of these readings because very costly, and often infrequent orders may skew the data in some months. However, the core goods, which exclude transportation and defense sectors, still increased more than double the median projection, according to Bloomberg. These durable goods orders placed can point to future increased factory activity down the entire supply chain. In addition, consumers and businesses typically are diligent about the purchase of large-ticket items so an increase in these orders can point to increased confidence and a positive outlook.

While many will debate whether these economic data readings are strong enough to support current stock market levels, it’s hard to argue that there are not any signs that the economy is on the rebound. However, we still have a long way to go before getting back to pre-COVID-19 economic growth levels and there will undoubtedly be bouts of heightened stock market volatility along the way as news on the virus itself continues to unfold. An experienced financial professional can help manage portfolios through various market cycles within an appropriately diversified framework that is consistent with investor’s objectives, time-frame, and tolerance for risk.

We recognize that these are very troubling and uncertain times and we want you to know that we are always here for you to help in any way that we can. Please stay safe and stay well.
Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 6/27/20.

Rates and Economic Calendar Data from Bloomberg as of 6/27/20. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index, U.S. Large Cap defined by the S&P 500. Sector performance is measured using GICS methodology.

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