Looking Ahead - Wells Fargo Advisors

Looking Ahead

Advice & Research Jennifer Timmerman, Market Advice Associate

Angela Shin, Market Advice Associate Jack Kraft, Market Advice Associate June 12, 2020

Wall Street continued flying high early in the week, with the S&P 500 edging into positive territory for the year and the Nasdaq Composite topping the 10,000 point level for the first time. But optimism soon hit a wall, sending stocks back down to earth as investors digested a sobering outlook from the Federal Reserve and reassessed the sharp run-up in stocks that had brought about concerns of outstretched valuations. Meanwhile, an uptick in reported COVID-19 cases across the U.S. reignited fears of a second wave of infections that could potentially stall the economic recovery. Treasury yields tumbled from the highest levels in three months as the increased uncertainty bolstered demand for perceived safe haven assets.

S&P 500 Index Performance: June 8-12

Source: Bloomberg *As of June 12, 1:00 p.m. ET

Investment and Insurance Products: NOT FDIC Insured NO Bank Guarantee MAY Lose Value

Looking Ahead

June 12, 2020

Heading into Monday's session, investors were still cheering a shocking jobs report from the Department of Labor that had surprisingly shown an increase in non-farm payrolls last month, as well as a lower-than-expected unemployment figure. The release had further supported expectations for a "V-shaped" recovery, sending the S&P 500 to its third-straight weekly gain of more than 3% for the first time since 1982. As the market opened for trading Monday, travel-related stocks led the advance, perpetuating a recent trend fueled by optimism concerning more economic reopenings around the globe. Airlines and cruise line operators were once again among the standouts as investors felt reassured that business activity would quickly resume to normal. In fact, U.S. airline stocks had just come off their best weekly performance on record, with the S&P 500 airlines sub-industry surging 34.5%.

Select S&P 500 Sub-Sector Performance since Feb. 19, 2020

Source: Bloomberg *As of June 12, 1:30 p.m. ET **Feb. 19, 2020 marks the S&P 500's most recent all-time high

The positive mood carried through the day, and by the close, the S&P 500 had completely erased its year-to-date decline in just 53 sessions. In fact, over the 10 weeks since bottoming in March, not a single S&P 500 constituent was in negative territory. The sharp rally had caught most Wall Street strategists off-guard, with Monday's ending level of 3,232 more than 10% above the average 2020 year-end forecast for the benchmark. According to Bloomberg, this was the widest disparity in data going back to 1999. Meanwhile, the Nasdaq Composite closed at a new all-time high for the first time since February 19, and those 76 trading sessions marked the fastest recovery on record for the Tech-heavy index.

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Looking Ahead

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By Tuesday, some investors assessed the rapid pace of the U.S. equity market rebound and took the opportunity to realize some profits. The S&P 500 dipped back into the red for the year, while the Dow snapped a six-session winning streak. Even the small-cap Russell 2000 Index took a breather after climbing more than 10% during the first six trading days of June. The Nasdaq Composite bucked the downtrend, however, as Tech and related shares proved resilient. The benchmark surpassed the 10,000 point level on Tuesday and closed above the psychologically important threshold for the first time ever on Wednesday. Notably, Tech titans Microsoft and Apple climbed to fresh record levels, as did e-commerce giant Amazon.

Risk sentiment in the broader market really started to shift mid-week, with all eyes on the Federal Reserve's policy decision Wednesday. As expected, the FOMC left its benchmark interest rate unchanged and reiterated a commitment to utilize their full range of tools to support the U.S. economy. However, officials still viewed the COVID-19 pandemic as a significant risk to the economic outlook over the medium term, with a recovery in the labor market anticipated to pose a challenge. Furthermore, all policymakers expected the Fed-funds rate to remain near zero through 2021, while all but two committee members forecasted that rates would remain stagnant until the end of 2022. The central bank also said bond purchases would continue at the current pace. The cautionary commentary from Fed Chair Jerome Powell and the committee's downbeat economic projections both resulted in decisively dovish meeting takeaways.

As optimism surrounding a swift economic recovery faded, Treasuries rallied the most in nearly two months, with the yield on the 10-year note down 10 basis points on the day to 0.72%. This shift stood in sharp contrast to last week's bond market sell-off that had pushed the 10-year note yield as high as 0.96%, near a three-month peak. Also weighing on rates was an update showing consumer prices declined for a third-consecutive month in May, while the annualized figure rose just 0.1%, the smallest uptick since September 2015.

Benchmark U.S. Treasury Yields since the End of May

Source: Bloomberg *As of June 12, 10:00 a.m. ET

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Looking Ahead

June 12, 2020

Risk assets were further pressured on Thursday as concerns surrounding a second wave of COVID-19 infections reemerged amid an increase in reported cases in several states. According to Reuters, cases in Arizona, New Mexico, and Utah jumped 40% during the week ended Sunday (June 7), while Florida and Arkansas were also among new hot-spot regions. The Dow plunged 1,861 points, marking the blue chip index's worst daily performance since mid-March. The S&P 500 declined 5.9% finishing in negative territory for the third-straight day and marking just the 28th time the benchmark has dropped at least 5% in one day since September 1952, according to Bespoke Investment Group. (Bespoke found that, historically speaking, the index has experienced an average advance of almost 19% over the following year when this magnitude of a decline occurs, with positive results nearly 83% of the time.) Meanwhile, the Nasdaq Composite was not exempt from Thursday's sell-off, retreating 5.3% to snap a four-session winning streak.

Sentiment stabilized on Friday, with the CBOE Volatility Index (VIX) easing from its highest level since April 23. Stocks recouped part of Thursday's losses as some investors "bought the dip." On the data front, a preliminary reading from the University of Michigan showed consumer sentiment improving more than expected in June. Still, the major averages remained on course for their first down week in the last four. As of 1:00 p.m. ET, the S&P 500 was up 0.5%, paring its weekly loss to 5.4% (and roughly 6.5% lower for the year). The Dow was set to fall 6.2% on the week, while the Nasdaq Composite was on course to slip 2.7%.

S&P 500 Sector Performance with FAANG*

Source: Bloomberg *As of June 12, 1:00 p.m. ET *FAANG represented by an equal weight portfolio of Facebook, Amazon, Apple, Netflix and Alphabet.

Also garnering attention this week was unusual price activity in a handful of stocks that had recently filed for bankruptcy. The most notable of these was car rental company Hertz, which saw its shares spike 577% during the three trading days ended Monday (June 8), having floated to the highest level since the 2016 U.S. presidential election on Friday (June 5).The primary driver appeared to be a flock of small retail investors (roughly 96,000 people, according to Bloomberg) opening positions in the stock over the last week on the commission-free Robinhood trading app.

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Looking Ahead

June 12, 2020

Looking Ahead to Next Week: June 15-19

Next week will feature a relatively light calendar of economic reports, with retail sales headlining the slate on Tuesday. The release is expected to reveal a 7.5% increase in May, rebounding from the prior month's 16.4% drop that had been the worst on record. On the real estate front, the NAHB is anticipated to show homebuilder sentiment improved further this month. Separately, housing starts are projected to bounce back from April's five-year low, while building permits are also forecasted to rise sharply in May (+14.9%) after tumbling 20.8% the previous month. Rounding out the docket will be updates on manufacturing activity in the New York State region, industrial production, the Philadelphia Fed's business outlook, and the leading index of economic indicators. In the central bank space, a handful of Federal Reserve leaders will deliver remarks throughout the week, while policy decisions from the Bank of Japan and Bank of England are also due. Elsewhere, some notable companies reporting earnings results include Oracle, Kroger, and Lennar Corp.

Disclaimers

Ticker Price

ORCL 51.31

KR

32.70

LEN

57.22

AAPL 335.90

MSFT 186.27

AMZN 2557.96

HTZ

2.06

Source: Bloomberg as of June 11, 2020 4:00 p.m. ET

All investing involves risks including the possible loss of principal. Equity securities are subject to market risk which means their value may fluctuate in response to general economic and market conditions and the perception of individual issuers. Investments in equity securities are generally more volatile than other types of securities. Dividends are not guaranteed and are subject to change or elimination.

Additional information available upon request. Past performance is not a guide to future performance. The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee as to its accuracy or completeness. This material is published solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or investment product. Opinions and estimates are as of a certain date and subject to change without notice.

Definitions An index is unmanaged and not available for direct investment.

The S&P 500 Index is a market capitalization-weighted index composed of 500 widely held common stocks that is generally considered representative of the US stock market.

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market.

The Russell 2000 Index is comprised of the smallest 2000 companies in the Russell 3000 Index, representing approximately 8% of the Russell 3000 total market capitalization.

The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) reflects a market estimate of future volatility, based on the weighted average of the implied volatilities for a wide range of strikes. 1st & 2nd month expirations are used until 8 days from expiration, then the 2nd and 3rd are used.

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