President Trump has said daily public briefings on the pandemic will resume as multiple states are seeing upswings in infections. New York City entered its final Phase Four reopening yesterday, which involves the resuming of professional sports (with no fans) and the opening of low-risk outdoor arts and entertainment. Gyms, indoor restaurant dining, and theaters will remain closed indefinitely.
EU leaders have proposed an $858 billion economic recovery fund. About 52% of the fund will be dedicated to grants and the remainder will be dedicated to low-interest loans. All 27 member states need to agree in order for the plan to move forward.
Fixed Income Market:
The credit markets saw another quiet week with IG spreads mostly unchanged – financials represented the lone exception as they tightened 10 bps on the back of surprisingly strong earnings releases by JPM, C, GS and MS. HY spreads were slightly tighter across all sectors as they continue to trade in lockstep with US equities. Many market participants remain on the sidelines, either on “staycation” or waiting for signs of a market breakout from the recent tight ranges. The new issue markets were also relatively quiet as many of the larger issuers remained in regulatory blackout due to pending earnings releases. This week we will see Q2 earnings from Tesla, American Express, Southwest Airlines and Halliburton among others. Also, executives from pharmaceutical giants Merck, Moderna, Pfizer, AstraZeneca, and Johnson & Johnson will testify before Congress tomorrow on their progress in developing a Covid-19 vaccine.
Meanwhile, maintaining an ongoing trend, new money continues to flow into the bond markets. On the week IG taxable funds saw $4.5bn of inflows while muni funds saw $655mm of new money – both according to Lipper.
Last week, the Dow Jones Industrial Average returned 2.29%, the S&P 500 +1.25% and the Nasdaq -1.08%. The past week was one of sector rotation as the tech-heavy Nasdaq which has gained 17% YTD underperformed the broader market benchmarks. In particular, streaming content provider, and market darling Netflix reported disappointing subscriber growth and posted a -10.16% return on the week.
Bank earnings also came into focus last week, as many of the largest U.S. banks reported Q2 earnings, and in totality were mostly better than feared. Covid-related loan losses were offset by capital markets activities.
Behavioral Biases to Avoid: Overconfidence
Overconfidence is a behavioral bias in which an individual believes that he/she has an information advantage and/or the ability to process the information better than the counterparty. Both of those beliefs are unlikely to be true for 99.9% of retail investors and even the vast majority of professional investors.
The speed at which data is now disseminated via the internet makes it almost impossible to have an information advantage. Similarly, “the wisdom of crowds” also has shown that the stock market almost instantaneously prices in that information quite accurately, thus mitigating any processing advantage.
To counter the effects of overconfidence, it’s best to be well diversified as this provides more chances to gain an advantage (if one exists) and lessens the impact if one is incorrect in a very concentrated portfolio. Second, one should focus on a buy and hold strategy; frequent trading of securities would mean that one has to be correct with their strategy on both the purchase and the sale of the security. Holding a portfolio of baskets of securities (mutual funds or ETFs) for the long run will more likely help an investor to build wealth over time.
Last Week's Economic Data July 20th
|Last Week's Economic Data||Actual||Survey|
|Retail Sales Advance MoM||7.5%||5.0%|
|Initial Jobless Claims||1300k||1250k|
|This Week's Economic Data||Release Date||Survey|
|Existing Home Salses MoM||7/22/20||21.5%|
|Initial Jobless Claims||7/23/20||1288k|
|New Home Sales||7/24/20||700k|
|Durable Goods Orders||7/27/20||6.5%|
This Week's Economic Data July 20th
|Interest Rates||Current||WoW||MoM||YoY||US Swap Spreads||Current||WoW||MoM||YoY|
|1 Month Libor||0.18%||(0.1 bp)||(1.4 bp)||(208.5 bp)||12-Month||+11 bp||+0.2 bp||(1.2 bp)||(0.4 bp)|
|3 Month Libor||0.26%||(1.5 bp)||(5.0 bp)||(200.4 bp)||2-Year||+7 bp||+0.2 bp||+0.2 bp||+4.8 bp|
|6 Month Libor||0.34%||(0.2 bp)||(7.5 bp)||(180.4 bp)||3-Year||+5 bp||+0.4 bp||+0.6 bp||+5.8 bp|
|12 Month Libor||0.46%||(1.7 bp)||(11.1 bp)||(169.3 bp)||5-Year||+4 bp||+0.3 bp||(1.2 bp)||+6.2 bp|
|Fed Funds Effective||0.09%||(232.0 bp)||7-Year||(2 bp)||(0.1 bp)||(1.2 bp)||+4.6 bp|
|SOFR||0.12%||+0.0 bp||+3.0 bp||(229.0 bp)||10-Year||(2 bp)||(0.6 bp)||(6.8 bp)||+27.9 bp|
|US Treasury Yields||Current||WoW||MoM||YoY||30-Year||(47 bp)||+0.2 bp||(10.3 bp)||+29.1 bp|
|12-Month||0.14%||(1.0 bp)||(3.1 bp)||(179.4 bp)||Equity Markets||Current||WoW||MoM||YoY|
|2-Year||0.15%||(0.8 bp)||(3.6 bp)||(166.9 bp)||Dow Jones||26,681||+0.0%||+3.1%||(1.7 %)|
|3-Year||0.17%||(1.0 bp)||(4.4 bp)||(161.0 bp)||S&P 500||3,252||+0.8%||+5.0%||+9.2%|
|5-Year||0.28%||(1.1 bp)||(4.8 bp)||(153.6 bp)||NASDAQ||10,767||+2.5%||+8.3%||+32.2%|
|7-Year||0.46%||(1.2 bp)||(6.9 bp)||(146.9 bp)||Currencies||Current||WoW||MoM||YoY|
|10-Year||0.61%||(0.8 bp)||(3.6 bp)||(166.9 bp)||Euro||1.1449||+0.4%||+1.7%||+2.1%|
|30-Year||1.31%||(0.8 bp)||(3.6 bp)||(166.9 bp)||Japanese Yen||107.1500||+0.1%||(0.2 %)||+0.7%|
|US Swap Rates vs 3ML||Current||WoW||MoM||YoY||British Pound||1.2712||+1.3%||+1.9%||+1.9%|
|12-Month||0.25%||(0.8 bp)||(4.2 bp)||(179.8 bp)||Canadian Dollar||1.3447||+1.2%||+0.6%||(2.4 %)|
|2-Year||0.22%||(0.6 bp)||(3.4 bp)||(162.1 bp)||Australian Dollar||0.7097||+1.7%||+2.7%||+0.9%|
|3-Year||0.23%||(0.6 bp)||(3.8 bp)||(155.2 bp)||Swiss Franc||0.9378||+0.2%||+1.1%||+4.7%|
|5-Year||0.32%||(0.8 bp)||(6.0 bp)||(147.4 bp)||Israeli Shekel||3.4235||+0.5%||+0.5%||+3.0%|
|7-Year||0.44%||(1.3 bp)||(8.1 bp)||(142.4 bp)||Bitcoin||9,371||+1.1%||(2.8 %)||(9.2 %)|
|10-Year||0.59%||(1.4 bp)||(10.4 bp)||(139.0 bp)||Commodities||Current||WoW||MoM||YoY|
|30-Year||0.84%||(0.5 bp)||(13.9 bp)||(137.8 bp)||Gold||1,838||+1.6%||+5.4%||+29.0%|
|Crude Oil||42||+4.0%||+5.5%||(24.6 %)|