Monday Market Review November 2, 2020
Economic data for the week included U.S. GDP for the 3rd quarter that rebounded in similar fashion to expectations, relative strength in areas such as personal income and durable goods, while housing data and consumer sentiment were mixed.
Global markets suffered their worst few sessions in months last week, as rising Covid cases in both the U.S. and especially Europe cast doubt on the near-term economic recovery. Bonds were mixed, with safe havens faring well, but foreign issues negatively affected by a strong U.S. dollar. Commodities also declined modestly, with lower oil prices pulling down the rest of the group.
U.S. stocks suffered the highest volatility in months, highlighted by Wednesday’s -3.5% sharp drop, with several indexes near or exceeding -10% correction territory. Every sector of the S&P was in the red last week, with cyclical energy and industrials down over -6%; communications, utilities, and real estate fared best, with declines of under -3%. Persistent Covid cases and fears of a second wave have continued to lurk beneath the surface this summer, with recent rising infection rates in both the U.S. and Europe leading to a deeper level of lockdowns in the latter. In particular, several European nations have implemented deeper restrictions for bars/restaurants, theaters, non-essential retail and the like—although usage had never recovered in the first place, as noted earlier in the U.S. Thursday’s rally helped offset this negativity somewhat, with company earnings coming in a bit better than expected, while Friday saw another decline.
Naturally, the connection between lockdowns and economic slowing is high, and the future path remains fluid. The vaccine timeline remains equally fluid, with mixed news over efficacy and distribution in 2021. We’re not yet past election season, which, in the potential worst case for uncertainly, vote tallying may continue well beyond next Tuesday if concerns over close races or mail-in ballot verification/challenges ensue. The certainty over an outcome, as usual, perhaps appears far more important to markets than the winner—at least in the short term.
Of special near-term interest is the plight of U.S. tech companies, which have been the single bright light of 2020 for investors, and have led the S&P higher—puzzling many. In fact, it’s been a smaller group of tech giants that have led the market’s results, with the rest of the S&P showing far less impressive returns (including many high quality, dividend-paying stalwarts). A combination of Congressional anti-trust scrutiny and even questions over high earnings growth have led to price consolidation in this group as of late, as well as valuations that became a bit frothy in some cases. Then again, when the tech, communications, and higher-tech consumer and health care stocks are included, this accounts for nearly half of market cap. So these new era stocks aren’t a novelty; rather, they increasingly are the economy.
Foreign stocks suffered the same negative fate as U.S. equities, with Europe faring several percent worse, and Japan and emerging markets losing a bit less. Results generally mirrored regional conditions surrounding a second wave of Covid infections and connected lockdowns, as cases in a variety of global locations are again reaching new highs. The ECB didn’t make any moves at this month’s meeting, but hinted at more support in December, as a result of recent lockdowns and assumed negative impact on economic growth. By nation last week, China experienced the strongest results (with minimal losses), in keeping with their better control over the virus and stronger reacceleration back into positive economic territory. Cyclically-sensitive regions such as Germany and France in developed markets, and Russia and Turkey in emerging, suffered the brunt of negativity, due to their reliance on global trade.
U.S. bonds were mixed last week, with long treasuries serving as a positive safe haven, despite long rates rising on net after the volatile week, while investment-grade corporates earned minimal gains. High yield and floating rate bank loans fell back, along with most taking of risk last week. Internationally, a stronger dollar served as a headwind to returns, affecting developed markets especially, as well as emerging market local currency bonds.
Commodities lost ground last week, in keeping with the bulk of risk assets, although declines in energy surpassed minimal losses in other sectors. The price of West Texas crude oil dropped by over -10% to a 5-month low at just over $36/barrel, with additional global lockdowns again threatening demand recovery.
(+) The advance report of 3rd quarter U.S. GDP came in showing a dramatic increase of 33.1% (annualized rate). This was technically the best single quarter since World War II, and stronger than the general market consensus calling for an increase of 32%. However, it trailed some private estimates in the mid-30’s, and overall, the level of activity remains several percent below that of a year ago. Very large movements in economic growth during quarters of extreme contraction and re-expansion obviously make the usually-scrutinized tenths of a percent less relevant, but also leave large room for potential error. For Q3, the details reflected a sharp improvement from the bottom in a variety of segments, including personal consumption, up 41% (durable goods consumption up 82%), with services just behind. Gross private domestic investment rebounded from a -47% drop to an 83% gain, in equipment more than structures. Inventories also increased slightly more than expected, and trade activity for both import and export goods (the latter being a critical input for GDP) each increased by over 100%. Government spending fell by over -6%, on the other hand.
The GDP number looks ‘V-shaped’ in many respects, compared to the 2nd quarter drawdown of similar but opposite magnitude (-31.4%), but this doesn’t mean all parts of the economy are out of the woods. For one example, air travel remains down nearly -65% from a year ago, although this is better than the year-over-year drop of -95% reported in April.
(+) Personal income for September rose by 0.9%, double the 0.4% median forecast, and reversed a sharp decline the prior month. The bulk of this was accounted for by higher wage and salary income, with a steady decline in government income benefit amounts. Most interestingly, income is up over 10% from the lows in March/April. Personal spending also increased, by 1.4%, which surpassed expectations of 1.0%, with levels now just -2% below pre-Covid levels. The difference resulted in a minor decline in the personal saving rate by -0.5% to 14.3%. The September PCE headline and core price indexes each rose by just under 0.2%; the year-over-year inflation rates increased by 1.4% and 1.6%, respectively. Overall, the report showed a continuation of improvements in personal consumption, although the composition has shifted.
(+) Durable goods orders for September showed an increase of 1.9%, which exceeded both last month’s result (including revisions higher) and expectations calling for 0.5%. Removing transportation from the group trimmed the increase to 0.8%, while the core durable goods orders number was a similar 1.0% for the month. Core capital goods shipments grew by 0.3%, which was just a tick below expectations.
(+) The advance goods trade balance report for September showed a tightening of the deficit by -$3.7 bil., to -$79.4 bil., compared to the expected widening to -$84.5 bil. Exports of goods rose by over $3 bil., continuing a string of several months of increases, led by food/beverages and capital goods. Goods imports ticked down by a half-billion.
(+) The FHFA home price index rose 1.5% in August, which surpassed expectations calling for 0.7%, and continued its strong rate of increase. Prices rose in every region, led by the West South Central (OK/AR/TX/LA) and New England regions, each up nearly 2% each for August. The year-over-year rate also continued to accelerate, by nearly 2% to an exceptionally strong 8.1%.
(+) The urban-focused S&P Case-Shiller home price index of 20 key cities rose by a more tempered 0.5% in August, which decelerated slightly from the prior month, but met expectations. All but one of the cities experienced an increase, led by San Diego and Seattle, each up 2%, while prices in New York City declined by a few tenths of a percent—likely related to Covid-oriented housing preference changes. Year-over-year, this index ticked up even higher, by another percent to 5.2%.
(-) New home sales in September fell by -3.5% to a seasonally-adjusted annualized rate of 959k units. This reversed the decent gain from August, which was also revised downward, and underperformed expectations calling for a 1.4% increase. However, on a non-seasonally-adjusted basis, this translated to 75k, which actually represented the highest such gain in 15 years. New home sales for the single month fell in three of the four national regions, led by the South and Northeast, while sales in the West increased during the month. Sales activity continues to run below that of demand needs, which appears to be a catalyst for the positive feedback loop back into tight inventories and price increases in desirable (especially suburban) areas.
(-) Pending home sales for September fell by -2.2%, which disappointed relative to the median forecast of a 2.9% gain. Sales declined in three regions by similar magnitude, while those in the Northeast increased by 2%. Year-over-year, pending sales have ticked up to 21.9%—a significant rate of growth.
(+) The Univ. of Michigan index of consumer sentiment for October ticked up by 0.6 of a point to 81.8, surpassing forecasts calling for no change at 81.2. Assessment of current conditions and expectations for the future both increased to a nominal degree. Expectations for inflation over the next year declined by a tenth to 2.6%, while that for the next 5-10 years was unchanged at 2.4%.
(-) The Conference Board index of consumer confidence in October ticked down by -0.4 points to 100.9, missing the median forecast calling for 102.0. Consumer assessments of present conditions rose by nearly 6 points, while expectations for the future fell by -5 points. The labor market differential, measuring the ease in finding employment, also improved by a few points, which is stronger than might be expected through official government job statistics. There were also other signs of optimism apparent in the report, which may reflect a variety of industries reverting back to more normal conditions—other than those tied closely to travel and tourism.
(+) Initial jobless claims for the Oct. 24 ending week fell by -40k to 751k, below expectations calling for 770k. Continuing claims for the Oct. 17 week also fell, by -709k, to 7.756 mil., which was just below the 7.775 mil. median forecast. Initial claims levels declined in several populous states, including TX, FL, and CA, while rising in MI and IL. Conditions remain mixed, in addition to continued pandemic effects, based on claims processing rates, and expiring benefits in several states.
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.