Monday Market Review October 19, 2020
Economic data for the week included strength in retail sales and consumer sentiment, regional manufacturing reports were mixed, while industrial production fell back. Producer and consumer inflation ticked up slightly, while jobless claims remain challenged.
Flattish U.S. equity markets outperformed foreign stocks, which declined last week, along with mixed political and economic news. Bonds were also mixed, with slightly positive returns domestically, coupled by weakness abroad in keeping with a rising dollar. Commodities were similarly mixed, with agriculture and energy seeing gains.
U.S. stocks moved in opposing directions last week, ending flat, as hopes for Congressional stimulus progress appeared to wane, with the Treasury Secretary reporting that a package before the election again appears less likely (although these sentiments continue to evolve). Rising Covid infections, especially in Europe, also negatively affected the mood. Better economic data and continued push to some type of eventual stimulus appeared to help markets turn the corner by late week.
Sector results were as mixed last week as has been seen in some time. Industrials, technology, and communications services all gained up to a percent, while energy and financials suffered among the largest declines of over a percent each. Real estate also fell by over -2%. In technology specifically, the positive feedback over the rollout of a new Apple iPhone model and related products has been tempered a bit by a rising anti-trust tide surrounding the largest firms, led by Missouri Sen. Hawley. Earnings for Q3 will be forthcoming during the next few weeks, and may serve to divert some attention from the political side, although the Presidential election is right around the corner as a source of potential volatility (especially the Senate races).
Foreign stocks were down across the board, hurt no doubt to some degree by a re-strengthened U.S. dollar. Shares in the U.K. fared worst, with a continued bout with worsening Covid cases and uncertainty over Brexit resolution making headlines. While it seems that Brexit should have been hammered out by now, a few remaining sticking points have gummed up negotiations, and raised expectations for possible last-minute dealing. Emerging markets also declined, but outperformed continental Europe and Japan slightly. Strength in Chinese stocks, upon continued recovery in economic data there, such as exports last week, outweighed declines in most other key nations, including Brazil, India, and Russia. China will likely end 2020 as one of the few world economies with positive GDP growth, which has already been reflected in equity prices.
It appears that the European Central Bank (ECB) will be following the U.S. Fed’s lead in adopting ‘average inflation targeting,’ in an effort to keep rates accommodative in hopes of generating some inflation. In contrast to the U.S., though, Europe’s historical experience with inflation has been much more damaging (1920s Germany), which creates an additional sensitivity to adopting too extensive of a pro-inflation framework.
U.S. bonds ticked slightly higher as interest rates fell across the yield curve. Long-term treasuries and investment-grade corporates performed similarly, while high yield and bank loans were little changed. Foreign bonds in both developed and emerging markets fell along with a stronger dollar, with emerging market local debt down nearly a percent.
Commodities were generally flat on the week as a group, with gains in agriculture (largely in wheat) and energy offset by a decline in precious metals. The price of crude oil rose by about a percent to around $41/barrel, as some signs of price strength have been cut short by rising Covid cases—weighing on perceived demand.
(+) Retail sales for September rose by 1.9%, three times the growth of August, including several revisions for prior months, and beating the median forecast calling for 0.8%. Removing gas stations, autos, and building materials, core/control sales still rose 1.4%, which exceeded expectations. In other areas, clothing, department store, and sporting goods sales were up 5-10% each for the single month, while sales for electronics declined slightly. Overall, this brought the year-over-year change to a positive 5%, and up 4% from the pre-Covid high in February.
(-) Industrial production in September fell by -0.6%, which disappointed relative to expectations of a 0.6% monthly increase; however, several prior months were revised upward. While segments outside of automotive production were little changed on net, auto manufacturing fell by -4%, and utilities fell by nearly -6%. Capacity utilization fell by -0.5% to 71.5% for the month. It is interesting to note that while production has improved since lockdowns began earlier in the year, just over half of the initial decline has been recovered so far.
(+) The Philadelphia Fed manufacturing index rose by 17.3 points to 32.3, beating forecasts calling for 14.8. Increases were seen in key areas such as new orders, shipments, and prices paid, each of which moved even more solidly into expansion, while employment ticked down a bit, yet still expanded. Expectations for business conditions six months out rose by 6 points to a very expansionary 63 level.
(-) The Empire manufacturing index, on the other hand, fell by -6.5 points to a still-expansionary 10.5, below the median forecast of 14.0. However, the underlying components of new orders, shipments, employment, and prices paid all rose by several points—deeper into expansion. Lagging was the future business conditions index, which fell by nearly -8 points to a still expansionary 33. Overall, both of these indexes point to a continued resurgence of optimism in the industrial segment.
(0) The producer price index for September rose by 0.4% on both a core and headline level, a tenth higher than last month’s pace, above expectations for about a 0.2% gain. During the month, energy price declines were offset slightly by a 1% gain in food, while the prices for crude materials outside of these areas increased by 7%.
(-) The consumer price index for September rose 0.2% on both a headline and core level, subtracting food and energy prices. Weakness was seen in shelter and healthcare, while used car prices (up 7% for the single month) represented one of the few segments showing price strength. Year-over-year, inflation has decelerated to increases of 1.4% and 1.7%, on a headline and core basis, respectively. Overall, this is the slowest pace in nearly six months, but the underlying inputs were mixed. The downward pull was led by areas such as -17% decline in the prices for energy commodities and -6% for apparel, as well as several areas directly affected by the pandemic recovery, such as airlines and hotels. This offset a relatively tempered 2% increase for shelter prices, yet more robust inflation of over 4% for food and medical care services, as well as used cars, due to scarcity.
(-) Import prices increased by 0.3% in September, which was in line with expectations, and a deceleration from the prior month. Removing petroleum from the index, which declined by -4.2%, prices gained 0.7%, led by both industrial supplies and food.
(+) The preliminary Univ. of Michigan index of consumer sentiment for October rose 0.8 of a point to 81.2, exceeding expectations calling for 80.5. Consumer assessments of current conditions fell by nearly -3 points, while expectations for the future rose by over 3 points. Inflation expectations for the coming year rose by 0.1% to 2.7%, while those for the next 5-10 years fell by -0.3% to 2.4%.
(-) Initial jobless claims for the Oct. 10 ending week rose by 53k to a seven-week high of 898k, as opposed to an expected decline to 825k. Continuing claims for the Oct. 3 week fell by 1.17 mil. to 10.02 mil., just below the forecasted 10.55 mil. Claims numbers in CA were frozen for several consecutive weeks, as officials attempted to whittle down a large backlog and reduce the potential for fraud. Claims rose in the upper Midwest, due to a resurgence of virus cases. There appear to be continued counting problems, and possible duplication of some data, due to the extended programs in play.
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, Marketwatch, 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.