Week in Review

Week in Review: June 1, 2020

New Headwinds


Last week, the U.S. economy continued on its gradual path of reopening, leaving only a few isolated areas of the country still under lockdown. Meanwhile, around the world, policymakers continued going “all in” with their efforts to lift their economies from the pandemic-inflicted damage. In turn, a steady but slow decline in the number of new COVID-19 infections, coupled with reports of progress on a number of experimental vaccines currently under development, helped bolster optimism of an economic recovery taking shape later this year. At its peak levels last week, the S&P 500 climbed within 10% of its all-time high, pushing safe-haven assets lower as investor risk appetite surged. However, this new stimulus is starting to be offset by rising geopolitical uncertainty, worries over violent protests in the U.S. and concerns by health authorities that prematurely abandoning safety protocols may spark a second wave of infections sometime later this year.

The Long Road to Recovery

With stay-at-home and business restrictions now being eased by some governments, small green shoots of recovery are beginning to emerge. Most of the 50 states have now begun to ease their lockdown measures, with several maintaining only minor restrictions on normal activity. A new batch of economic reports last week signaled a slight pickup in activity since late March and early April, supporting the case that the most severe impacts of the lockdown-related economic shutdown may be behind us. This morning, the Institute for Supply Management indicated that U.S. manufacturing activity eased off an 11-year low in May as lockdown restrictions began being lifted (see Figure 1). Nevertheless, manufacturers and the economy more broadly have a long way to go to return to anything close to normal. Gross domestic product contracted at a 5% annualized rate in the first quarter of the year — the worst performance since the 2007-2009 recession — and experts argue that the reopening of the economy appears to be a slow-moving process, and thus, it will be difficult to get back to 2019 levels of GDP in a (still) socially distanced world. Severe demand destruction, ongoing supply chain disruptions, extremely elevated uncertainty, tighter financial conditions, low oil prices and fears of a second wave of contagion are expected to weigh on the economic recovery.

Further, optimism about the potential economic recovery is being tested by protests in dozens of cities around the country following the death of George Floyd, the Minneapolis man killed by police last week. As a result, social unrest and public anger against police violence have taken place for six straight days in dozens of cities, forcing the closure of some of the largest retailers, right as they were reopening after COVID-19 shutdowns. The riots that have spread like wildfire across major U.S. cities are proof that unpredictable events can materialize quickly and change the outlook in unexpected ways. In our view, the protests are important for policy changes, particularly as Congress gets set to debate a new stimulus package and with the U.S. presidential election coming later this year. In the past, however, these events have been non-issues for equity markets. This could partly be because protests cause policymakers to address change and because of the short-lived nature of the protests.


“The Great Decoupling” 

On the geopolitical front, not only has the trade relationship between the U.S. and China failed to improve after the signing of the “phase one” deal, but the world’s two largest economies are also clashing over numerous other issues: accusations by the U.S. that China mismanaged its response to COVID-19, a heating up of the technology “cold war”, and rising political disagreements over China’s expansionary agenda around the world. In a press conference Friday afternoon, President Trump discussed China’s “pattern of misconduct” that includes its actions with regard to COVID-19 and Hong Kong. The President further announced that the U.S. will terminate its relationship with the World Health Organization, suspend foreign nationals from China who are security risks from coming to the U.S., and will also have the Administration’s working group on financial markets look at the accounting practices of Chinese companies that are listed on domestic stock exchanges. President Trump also said that the U.S. could soon begin the process of eliminating the special treatment afforded to Hong Kong (including the extradition treaty, export controls on dual-use technology, travel advisory and treatment as a separate customs territory), and take steps to sanction Chinese and Hong Kong officials involved in eroding Hong Kong’s independence.

The recent deterioration in international relations could also cement the reemergence of competing blocs, as witnessed during the Cold War, according to several political scientists. China is already well into the creation of its own economic sphere with its ambitious Belt and Road Initiative, which seeks to link to and expand its influence on economies across Asia, Africa and parts of Europe. Similar efforts have also been replicated around Latin America and the Caribbean. Amid the pandemic, these areas have received a wide range of donations, from testing kits to ventilators, revealing a new face of Chinese diplomacy and soft power. As the West reels from the outbreak, China is striving to project its own early success against COVID-19 as a model response. The implications of such trade and diplomacy goals are significant: If successful, the Chinese Communist Party would change the norms of international governance, upending the global balance of power and winning a lasting strategic victory over the U.S. at large without firing a shot. Additionally, China and the U.S. are on a technological race to develop a host of innovations such as 5G telecommunications networks, which are expected to transform the way people live and work by supplying a faster and more reliable internet connection. 

Investment Implications 

In the current investment environment, we still hold a favorable view of equities over bonds. Even if a vaccine does not become available later this year, increased testing should allow for a more economically palatable approach to containment strategies. However, given the high levels of uncertainty going forward, we expect occasional pullbacks in the equity rally. The recent market action suggests that asset prices are currently anticipating economic surprises to turn sharply higher in the near future. Thus, any adverse events, such as geopolitical developments, that can push the distribution of growth surprises to the left in the near turn will negatively impact the market. However, equities are currently in no imminent danger of retesting their March lows, according to most market analysts. Moreover, the equity market recovery has continued broadening; the majority of NYSE stocks stand above their 50-day moving average. When this occurred, it did not preclude a short-term pullback, but instead, equities generated positive returns over the coming 6 to 12 months 90% of the time.


Figure 1: Institute of Supply Management Manufacturing Index

  ISM Manufacturing  

Source: Thomson Reuters (6/1/2020).

Market Returns (USD)





Global Equities

MSCI All Country World

3.6% 15.5% -9.2% 5.4%

S&P 500

3.0% 18.2% -5.0% 12.8%

Dow Jones Industrial Average

3.8% 16.4% -10.1% 4.8%


1.8% 23.5% 6.2% 28.7%

Russell 2000

2.9% 21.1% -15.9% -3.4%

First Republic Founders Index

2.6% 29.2% -2.7% -

Russell 1000 Equal Weighted

3.6% 25.4% -10.6% 1.5%


5.1% 11.1% -14.3% -2.8%

MSCI Emerging Markets

2.9% 10.0% -16.0% -4.4%

Fixed Income

ICE BofAML Municipals 1-10 Year A-AAA 

0.2% 2.1% 1.5% 3.5%

Bloomberg Barclays Intermediate Government/Credit

0.3% 2.2% 4.6% 7.6%

Bloomberg Barclays High Yield Bond

1.8% 9.1% -4.7% 1.3%

JPMorgan GBI Emerging Markets Global Diversified

2.0% 9.3% -7.3% 2.1%

Market Levels


Week Ago

Year End

Year Ago

S&P 500

3044.31 2955.45 3230.78 2744.45

Dow Jones Industrial Average

25383.11 24465.16 28538.44 24819.78

10-Year U.S. Treasury Yield (Constant Maturity)

0.65% 0.66% 1.92% 2.22%

Gold ($/oz)

$1,730.27 $1,734.68 $1,517.27 $1,325.31

Crude Oil ($/barrel)

$35.49 $33.25 $60.41 $53.50

U.S. Dollar / Euro ($/)

1.11 1.09 1.12 1.12

U.S Dollar / British Pound ($/£)

1.23 1.22 1.33 1.27

Japanese Yen / U.S. Dollar (¥/$)

107.83 107.64 108.61 108.29