Each month, representatives from Allianz Investment Management LLC provide commentary on market and economic indicators, including Federal Reserve actions, interest rates, credit markets and economic releases such as inflation, GDP, consumer confidence, housing, retail sales and job unemployment news.
Allianz Investment Management LLC August Market Update
Equities were able to shrug off the negative news surrounding increased virus cases, as fiscal stimulus hopes and strong earnings from the technology sector were able to push the S&P 500® Index closer to a new record high. Big tech was the shining star as the Nasdaq-100® Index rose to an all-time high in anticipation of strong profit reports. Additionally, the low rate environment created by the Fed has enticed investors to shift into stocks as dividends continue to look to be an attractive alternative. Going forward, we see a tremendous amount of uncertainty surrounding the path of the virus and the upcoming election that could be a challenging headwind for risk assets.
Market volatility, measured by the CBOE’s VIX Index, declined throughout July, but the overall level remains above pre-pandemic levels. The index declined just over 23% in July as positive sentiment towards risk assets improved throughout the month. Despite overall levels of market volatility subsiding recently, we suspect there will be ample opportunity for increased volatility in the coming months as the economy continues to battle the fallout from the pandemic and jitters prior to the upcoming U.S. elections.
Treasury yields have been anchored by Fed policy including bond purchases from the Fed that have led to a flatter yield curve. Throughout the month of July, rates continued to drift lower on Fed purchases and concerns over the increase in virus cases. The Fed has indicated they are in no hurry to raise interest rates, and they have purposely been vague on forward guidance until there is more clarity on the path of the virus. Some market participants have expressed concern that rising inflation will cause real yields to become too negative, but the Fed appears unconcerned with rising inflation when the unemployment rate is at 10%. On balance, we expect rates to remain range bound on the long end until the economy normalizes and growth moves back to potential. In addition, we do not expect the Fed to raise rates any time soon.
Price action in West Texas Intermediate (WTI) crude oil was muted throughout most of July as investors weighed the speed of the global economic recovery with the tapering of supply cuts from OPEC producers. WTI crude oil ended the month slightly above $40 per barrel, and the price is likely to hold around that level until there is further evidence of a pickup in global growth.
Survey based indicators, such as the ISM Manufacturing and ISM Non-Manufacturing data, both surprised to the upside this month, increasing to 54.2 and 58.1 respectively. Within the Manufacturing sector data, the new orders and production components drove the uptick while the rebound in employment has been slow to materialize. Turning to the Non-Manufacturing sector, the employment component continues to lag but gains from the business activity, and new order components were more than enough to offset the pullback in employment. Overall, upticks in both sectors suggest that recovery is taking place from a production and output perspective but continues to lag from the employment perspective.
Retail sales for June came in better than expected at 7.5% versus estimates of 5%. The gain was primarily driven from purchases at clothing stores, which was up 105.1% and electronic store sales which increased by 37.4%. The second consecutive month of strong retails sales has brought the dollar amount of retail sales back to the level we had seen before the pandemic began. Ultimately, while the rebound in consumption is a welcomed sign following the shutdowns, we are cautiously optimistic on June’s uptick given the resurgence of virus cases in the United States combined with declining consumer sentiment readings in recent weeks.