Global markets continued a run that has resulted in developed markets (DMs) reaching new highs (MSCI World +6.7% MoM and +5% YTD), with the US market leading the way (S&P 500 +7.2% MoM and +9.7% YTD). Six stocks in the S&P 500 (the FAANGs [Facebook, Amazon, Apple, Netflix, Alphabet] and Microsoft) are up around 50%, in aggregate, YTD. These counters represent around a quarter of that index’s market cap and are responsible for all the YTD performance of the index. While the large-cap US tech stocks have done enough to drag global markets into the green YTD, other regions and sectors still languish. The UK’s FTSE 100 Index and Europe’s Eurostoxx 50 Index are both still comfortably in negative territory for the year (-18.9% YTD and -17.7% YTD in local currency terms, respectively).
Emerging market (EM) stocks performed well enough in August to push the MSCI EM Index into positive territory for the year (+2.2% MoM and +0.4% YTD), thanks largely to the performance of India and China’s stock markets. At a sector level, the concentration in the recovery means that several S&P 500 sectors are still down YTD including energy, financial and industrial stocks (-39.3%, -17.4% and -3.3% YTD, respectively).
August also saw the completion of US corporate earnings reporting for 2Q20, with aggregate earnings down around 7% YoY – well ahead of expectations, but with a meaningful divergence as those companies and sectors hardest hit by the impact of the COVID-19 pandemic experienced significant losses (e.g. energy sector earnings dropped by more than 50% YoY and financial sector earnings fell by 30% YoY as banks were forced to take enormous provisions against potential future losses).
The market’s progression was briefly interrupted by concerns around the inability of US congress to agree on new stimulus measures. The release of the latest US Federal Reserve (Fed) minutes also put paid to the prospects of the Fed applying yield curve control to keep US 10-year bond rates anchored at close to 0% and, while Fed Chair Jerome Powell, met expectations with the announcement of a relaxation in the Fed’s approach to inflation targeting, he put a damper on rates markets by making it clear that the Fed would act to raise rates should inflation get out of control. All this resulted in US 10-year rates rising by 0.2% to end the month at 0.7% and also put the brakes on a rally in the gold price, which had seen it briefly breach $2,000/oz during the month.