Monday Market Review November 16, 2020
In a light week for economic data, releases included slight increases in producer and consumer prices, slow improvements for labor, and weaker consumer sentiment.
Global equity markets rallied strongly upon the more solidified U.S. election results from the prior week, and the announcement of promising Covid vaccine trials. Bonds fell back in keeping with higher interest rates, and foreign bonds from a stronger dollar. Commodities also rallied, with oil prices following expected improvement in petroleum demand.
U.S. stocks shot up sharply Monday morning by over 3%, upon a combination of a more decisive Joe Biden Presidential victory, and likely perhaps even more so by reports that Pfizer’s preliminary findings from its mRNA-based Covid vaccine that has proven 90% effective. (This is quite high for a vaccine of any type, let alone one using new technology. Moderna’s vaccine results, using similar technology, are expected soon.) The week ended with the S&P reaching another record high, as prospects for the future are looking brighter, despite a current setback of surging Covid cases nationwide.
By sector, cyclicals demonstrated the strongest performance last week, as expected by the economic improvement anticipated by test results for an effective vaccine. Energy surged over 15%, followed by strong gains for financials and industrials of 5-10%. Real estate also rose 5%, despite rising interest rates, but offset by the expected goods news on tenant fundamentals brought on by economic improvement and removal of a large input of uncertainty from retail. The weakest results were from technology, which lost ground last week, counter to this year’s trend, and communications and consumer discretionary stocks, which gained minimally. This knee-jerk rotation to ‘value’ is not surprising, but it may be premature to call a turn in the cycle completely yet. Small cap stocks also outperformed large caps, due to their perceived sensitivity to economic conditions (and lower valuations).
Foreign stocks rebounded strongly last week, more so in developed regions Europe and the U.K., which outperformed Japan and the emerging market group. This was perhaps driven by the intensified Covid spread in the former (which has reached new records in some countries), and stronger implied recovery impact from a vaccine. Emerging markets were pulled down by a decline in China, where a major state-owned utility company defaulted on its debt, requiring central bank intervention. This was coupled with a U.S. ban on investment in firms tied to the Chinese military, including several popular telecom firms. Turkey rallied 20% as President Erdogan responded to hopes for a more independent central bank and new economic policy team. Presidential meddling has been blamed for the lack of transparency and less conventional monetary policies implemented by the country in recent years—raising the market volatility of their currency and foreign debt yields.
U.S. bonds retreated last week, as interest rates ticked slightly higher upon hopes for nearer-term economic recovery. However, the 10-year treasury note yield did pull back a bit from approaching the 1.00% level for the first time since March. Longer-duration assets bore the brunt of the decline, with investment-grade corporates outperforming treasuries slightly, although both declined by several tenths of a percent. Floating rate bank loans, on the other hand, gained nearly a percent. Developed market foreign bonds fell sharply, suffering from both rising rates and a stronger dollar, while emerging market bonds earned positive returns along with other risk assets.
Commodities gained as a whole, as hopes for higher demand outweighed the headwind of a stronger dollar last week. Energy, industrial metals, and agriculture rose at least a percent or more while precious metals, known for performance when uncertainty reigns, fell by a few percent. The price of crude oil bounced back by over 8% to just above $40/barrel. Even more so than other risk assets, petroleum has been held back by a lack of consumer and business demand—lessened driving, flying, and general manufacturing. In recent meetings, OPEC recently appeared more committed to containing supply in an effort to sustain or even boost prices further.
(0) For October, the producer price index rose by 0.3% on a headline basis, and 0.1% for core, removing food and energy prices. Headline PPI was a tenth higher than expectations, while core was a tenth below. Underlying components were led by a 1% rebound in energy prices, and over 2% in food on the headline side, in addition to noted shortages of delivery drivers, and lumber, which raised prices in those segments. While the recovery in PPI over the past six months has been the most rapid in a decade, year-over-year, PPI is up 0.5% on a headline basis, and 1.1 on a core level, without food and energy, respectively. The demand-related drop in oil prices accounts for this tempering of price increases to some degree, but price levels overall remain contained, other than segments affected by unique supply/demand imbalances related to the pandemic.
(0) The consumer price index was unchanged on a headline and core level for the single month of October, as pandemic cross-currents continued to tamp down prices. Monthly figures were mixed, with food prices ticking up slightly, while crude oil, apparel, and medical services prices declined by several tenths (medical services by their fastest pace in over four decades). The more widely used trailing 12-month measure of inflation showed further deceleration to 1.2% on a headline level, and 1.6% for core, removing food and energy prices. The year as a whole was broadly affected by a nearly -20% net decline in the price of energy, although there has been some snapback as of late, as re-imposed global lockdowns have been offset by hopes that a vaccine will spur demand (such as for airline prices). In the meantime, from a backward looking standpoint, prices have taken a deflationary turn.
(-) The preliminary Univ. of Michigan index of consumer sentiment reading for November fell by -4.8 points to 77.0, below expectations of a flattish 82.0. Survey respondent assessments of current conditions were generally flat from the prior report, while expectations for the future fell by nearly -8 points—apparently influenced by both election angst and rising Covid infections. Inflation expectations for the coming year ticked up by 0.2% to 2.8%, as did those for the next 5-10 years to 2.6%.
(0) The government JOLTs job openings report showed an increase of 84k positions in September to 6.436 mil., which fell just short of expectations calling for 6.500 mil. The job openings rate remained flat at 4.3%, hiring rate fell by a tenth to 4.1%, layoff rate fell by -0.2% to 0.9%, and the quits rate ticked up a tenth to 2.1%. Overall, these metrics were supportive of labor market repair, with improvements on the worker side, despite slower growth in hiring from employers.
(+) Initial jobless claims for the Nov. 7 ending week fell by -48k to 709k, stronger than the expected 731k. Continuing claims for the Oct. 31 week fell by a substantial -436k to 6.786 mil., below the 6.825 mil. level expected. Initial claims were led by decreases in GA, NJ, and TX, while WA saw a gain in claims. As has been the case for weeks, continuing claims numbers are dropping due to claimants falling off the eligibility register in a variety of states—rather than finding employment.
(-) The Federal Reserve’s Senior Loan Officer Opinion Survey for the 3rd quarter showed a general weakening of loan demand by bankers, coupled with still-tighter lending standards. Specifically, this survey notes the percentage of banks noting certain characteristics, rather than the magnitude of change, which provides a different perspective than some financial reports.
For commercial/industrial loans, demand weakened and standards tightened, albeit at about half the pace of the prior quarter, with a similar reduction in banks increasing loan rate spreads. For those banks tightening standards, reasons were based on an uncertain economic environment as well as reduced risk tolerance (which reflects as much on the bank’s internal metrics as those of borrowers). Commercial real estate loans saw a similar tightening of standards, while demand also declined, although both at a lesser degree than the prior quarter. Residential real estate loans saw continued stronger demand, and far lessened tightening of standards for borrowers—in keeping with a strong housing market noted in other data. Consumer installment loan demand picked up a bit, such as auto loans, and bucked the trend of dramatic declines the prior quarters of 2020, while the willingness to make such loans was little changed. Credit card loans saw little change in demand (interesting due to the continued difficult conditions for many American workers), while standards tightened, but at a lesser degree. Overall, the tightening of credit earlier the year seems to be easing somewhat, but banks remain cautious due to continued economic uncertainty.
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.