Cambridge Weekly – 24th August 2020

Fed leaves bond investors with that sinking feeling

Capital markets were mostly steady – if a bit on edge – last week, as they have been for most of August. At least the US maintained positivity, although the extent of gains were not spectacular. Even so, both the Nasdaq and S&P 500 indices surpassed their February peaks in midweek trading, leaving the stock market nosedive of March a distant memory. Tech giant Apple made headlines by becoming the first company in history to climb to a $2 trillion market cap (we write more about this in a separate article below). And all of this after the world economy has experienced its deepest, most widespread, recession ever.

We should not mistake the continued equity rally with increased optimism about the economy itself. Cyclical stocks and the more cyclical regions made gains last week, but that cyclical rally petered out yet again last week, with investor capital instead flowing once more towards the US tech super-caps.

Apple finds itself fighting an Epic battle

And Apple wept, seeing as it had no more worlds left to conquer. In 2018, Apple made history by becoming the first private company valued over $1 trillion. That milestone was 42 years in the making; but just two years later, Apple is worth double that. To make that feat even more incredible, the meteoric ascent to its second trillion took Apple just 21 weeks from its lows in March. History’s biggest company, of course, had a helping hand from a bullish stock market swimming in liquidity. But the sight of a corporate giant doubling its worth – while the global economy fell into its sharpest recession ever – speaks for itself.

Auto-recovery: turnaround or short-term bounce?

Like most industries, the automotive sector has been hit hard by the pandemic. Carmakers were already struggling well before the first COVID case came in, with changes to emissions regulations, a global manufacturing downturn and structural shifts in demand providing fierce headwinds. A global economic shutdown then came at the worst time it could, as stay-at-home orders and evaporating incomes choked off any hopes of a quick turnaround in fortunes. Data from the world’s seven largest car markets showed new auto sales were down 21% year-on-year in June, with the US and Europe registering sales numbers of -26.4% and -24.4% respectively.

Read the full commentary here