Monday Market Review August 24, 2020
Economic data for the week included strength in a variety of housing metrics, continued improvement in a broad index of leading economic indicators, but a pullback in several regional manufacturing indexes.
U.S. equity markets gained upon continued stronger economic data and hopes for a near-term vaccine, while foreign stocks lost ground due to continued uncertainty over global trade relations and a virus uptick. Bonds fared well as interest rates ticked downward again. Commodities were mixed, with little change in oil prices, while natural gas prices again spiked.
U.S. stocks gained last week, with continued strength in economic results—notably housing. By sector, technology, consumer discretionary, and communications led the way, in order, while cyclical energy and financials lost the most ground. Apple became the first $2 tril. market cap firm in history, when $1 tril. not that long ago was also record-breaking.
Foreign stocks in developed markets decoupled from domestic stocks last week by declining, while emerging markets eked out a flattish result. An uptick in Covid infections again in Europe held back sentiment, while tensions in U.S.-China trade appeared to hold back optimism more outside the U.S. than within. Tighter restrictions in areas such as Spain and Italy exacerbated this soured mood. Japanese GDP for Q2 was reported at an annualized -27.8%, which was largely in line or a bit better than other developed nations, yet still a record drop. Equities in Brazil declined as the government appears to be publicly wrestling with the need for additional financial stimulus, while also trying to hold the line on fiscal discipline to maintain credit and currency stability—a unique wrinkle that Covid woes have brought upon emerging market nations.
U.S. bonds gained across the board as interest rates ticked downward, with investment-grade and high yield corporates leading with the strongest results, with credit spreads tightening. Foreign bonds also inched upward, with the exception of emerging market local bonds, which lost significant ground.
Commodities were mixed to higher, as agriculture and industrial metals gains outshined flatter results for energy and precious metals. The price of crude oil rose by a dollar or so during the week, but ended at just over $42/barrel. Reports of slower oil demand weighed on general sentiment, despite the net increase. Natural gas prices spiked at one point due to reports of slower production—which raises fears of a winter warming shortage.
(-) The Empire manufacturing index fell by a sharp -13.5 points in August to a level of 3.7, well below consensus expectations calling for 15.0. Under the hood, employment improved and remained in expansionary territory, as did prices paid, while new orders and shipments fell by double-digit levels. Expected business conditions for the coming six months fell by a few points as well, but remained at a solidly expansionary level of 34.
(-) The August Philly Fed manufacturing index similarly fell by -6.9 points to a still-expansionary 17.2, below the median forecast calling for 20.8. The various components showed similar deterioration, including drops in shipments, new orders, prices paid, and employment—although all remained in expansion. However, the index for expected business conditions 6 months in the future rose by 2.8 points to a solid 38.8, seemingly reflecting optimism for a world beyond Covid.
(+) Existing home sales rose a substantial 24.7% in July to a seasonally-adjusted annualized rate of 5.86 mil. units, beating expectations calling for a 14.6% increase. In fact, this was the best single month result in 14 years. Condo/co-op sales rose over 31%, but were closely followed by single-family homes, which rose 24%. Sales rose in all regions, with the Northeast and west leading, at rates over 30%. Months’ supply has fallen to 2.8 months, a record low, while two-thirds of homes sold in July were on the market for less than a month. This represents a substantial drawdown in inventory, despite being in the throes of a pandemic, which homebuilders are having a difficult time countering. The conventional 30-year fixed mortgage rate falling below 3.0% for the first time has also provided a tailwind to activity. It is also interesting to note that there appears to be some degree of evolving buying interest moving toward suburbs and rural areas, and away from cities, as concerns over the pandemic caused a re-thinking of recent trends toward denser urban living.
(+) Housing starts for July rose a sharp 22.6% to a seasonally-adjusted annualized rate of 1.496 mil., which surpassed the expected increase of 5.0%. This also included a revision for a prior month, which already experienced a double-digit gain. Single-family starts rose by 8%, while multi-family was even more robust at just short of 60%. All four regions saw strong gains, but the Northeast and South were strongest at over 30% gains each. Building permits rose by 18.8%, beating expectations of a 5.4% rise. Multi-family permits were up 20%, but single-family were not far behind that growth trajectory. Regionally, the West and Midwest saw the highest monthly growth rates at well over 20%, but all four regions were in the double-digits.
(+) The NAHB homebuilder sentiment index rose by 6 points to 78 for August, beating expectations of 74 and reaching another record high. This measure tends to have a positive relationship with upcoming housing starts. All three indicators—current, future, and prospective sales—rose by several points, with the latter gaining the most ground. All four regions were also positive, with the West, Northeast, and South gaining at roughly similar magnitude, and Midwest less so.
(+) The Conference Board Index of Leading Economic Indicators for July showed an increase of 1.4%, continuing a string of consecutive growth months, albeit at a slower rate than May and June. The more significant contributors were manufacturing hours, building permits, and improved jobless claim results. Also for July, the coincident index rose by 1.2%, while the lagging economic index fell by -1.0%—also continuing trends of recent prior months. Over the past six months, the leading economic indicator still shows a decline of an annualized -13.1%, compared to a flat reading over the prior six months. Echoing the broader economy, recovery in this index continued, although the charts below show current levels far below the early 2020 starting points, despite early optimism in several sectors.
(0/-) Initial jobless claims for the Aug. 15 ending week fell rose by 135k to a level of 1.106 mil., higher than the 920k claims expected. Continuing claims for the Aug. 8 week, on the other hand, fell by -636k to 14.844 mil., a shade below the expected 15.000 mil. Initial claims were led by increases in the most populated states, which is indicative of a typical report. Both measures saw declines on a non-seasonally adjusted basis as well, which is helpful considering the magnitude and unusualness of the current economic situation.
(0/-) The July FOMC meeting minutes, in contrast to many releases of minutes, were a bit surprising to markets. Despite chatter in recent months about the potential use of ‘yield caps,’ or bond market purchases/sales that would target keeping certain interest rates on the treasury yield curve at a specified maximum level for a period of time, this option was seemingly put on pause for the time being. Instead, the committee appeared to focus on more conventional metrics such as rates of inflation and unemployment, as well as forward guidance communications. This doesn’t mean that yield caps are dead, but at least put on ice for the time being. (Perhaps the Fed assumes it needs to keep a few tools put away in the toolbox to dispel the widely-held assumption that it is running low.) It also seems possible that an average inflation-targeting framework (or letting inflation ‘run hot’ for a period during and even after recovery for a time) could be seen as an attractive option by the Fed. This is especially true considering their strongly accommodative stance, which doesn’t seem to have an ending point.
Otherwise, Fed participants noted that better clarity on the expected path of the funds rate would be desired (although such estimates have been notoriously incorrect and subject to continual adjustment, causing their value to be questioned). The future path of the fed funds rate is subject to economic outcomes in future months, which itself remains Covid-dependent, as Chair Powell himself has admitted.
Have a good week.
Ryan M. Long, CFA
Director of Investments
FocusPoint Solutions, Inc.
Sources: FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Citigroup, Deutsche Bank, FactSet, Financial Times, First Trust, Goldman Sachs, Invesco, JPMorgan Asset Management, Marketfield Asset Management, Morgan Stanley, MSCI, Morningstar, Northern Trust, PIMCO, Standard & Poor’s, StockCharts.com, The Conference Board, Thomson Reuters, T. Rowe Price, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wall Street Journal, The Washington Post. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. FocusPoint Solutions, Inc. is a registered investment advisor.
Notes key: (+) positive/encouraging development, (0) neutral/inconclusive/no net effect, (-) negative/discouraging development.