Monday Market Review October 26, 2020
Economic data for the week included continued strength in housing data, an improvement in jobless claims, as well as continued growth in the index of leading economic indicators, albeit at a decelerated rate from the past few months.
U.S. equity markets declined with continued uncertainty over a Congressional stimulus package; foreign stocks echoed this sentiment but were also pulled down by another wave of Covid cases. Bonds fell back along with higher interest rates, tied to the size of the pending stimulus. Commodities were mixed with oil falling back, but offset by higher agricultural prices.
U.S. stocks ended generally lower for the week, with lessened hope for a broad stimulus package, rising Covid cases, and some uncertainty over the stop-start progress of ongoing vaccine clinical trials. However, small cap stocks came in positively and have begun to show signs of life—with hopes the group would benefit due to their higher economic sensitivity during an eventual recovery and currently attractive valuations. By sector, communications services, utilities, and financials fared best, with gains of over a percent; on the other hand, technology and consumer staples lagged with the largest losses. Real estate was also mixed, and not helped by rising interest rates.
The government’s newly released antitrust case against Google search engine appears to be narrower and less robust than some predicted, resulting in a rally of the firm’s shares. This perhaps foreshadows the type of case potentially brought against other tech firms, should a broadening of antitrust activity come to pass. Third quarter earnings appear mixed, with the general results faring better than initial expectations (of narrower year-over-year losses of -16% versus a -33% decline the prior quarter), and 85% reporting a positive earnings surprise. However, only a fifth of companies have reported so far. The year 2020 continues to be a viewed as a ‘wash’ for most companies, as views of the coming months shift to possible recovery trajectories in 2021 and 2022.
What’s the status of potential stimulus? Following some optimism early in the week, the Senate was unable to come to an agreement, despite the relatively small monetary difference between the amounts proposed by House Speaker Pelosi, the Senate Republicans, and Treasury Secretary Mnuchin—with Pelosi noting that a deal was close. Remaining sticking points appear to be related to fiscal aid to certain states (that tend to run ‘blue’). Aside from the initial agreement remaining a problem, there remain ongoing concerns about getting a deal done in time for the election on Nov. 3. The results may undoubtedly play the largest role in when and how much additional stimulus comes together later, although there seems to be a consensus view that some type of stimulus is inevitable, especially considering the recent uptick again in Covid cases.
Foreign stocks ended the week barely positive in U.S. dollar-investor terms, with Europe, U.K., and Japan generally performing in line. Europe continues to be plagued by an again worsening pandemic environment, with curfews and lockdowns being put back in place in several countries. The ECB noted concern over economic recovery losing momentum given the continued uncertainty, which has weighed on confidence. Emerging markets outperformed with the best returns for the week, largely led by regions outside of China, including Brazil, Russia, Mexico, and South Africa.
U.S. bonds declined overall, as interest rates ticked higher along with an expected (expensive) stimulus package growing closer. This was also the likely catalyst for U.S. dollar weakness. Nevertheless, high yield outperformed investment grade for the week. Foreign debt benefitted from the weaker dollar in developed markets and emerging market local currency markets, while dollar-denominated EM declined.
Commodities were mixed last week, despite the usual aid of a weaker dollar. Agriculture prices rose, as drought conditions in a variety of areas threatened harvests, and industrial metals prices rose with improved optimism about global economic prospects. In energy, the price of West Texas crude oil fell by -3% to a few cents under $40/barrel, due to a continued rise in Covid cases threatening demand. On the other hand, natural gas prices spiked temporarily, as technical conditions of prices rising above $3 blended with forecasts of colder weather heating needs.
(+) Existing home sales for Sept. rose by 9.4% to a seasonally-adjusted annualized rate of 6.54 mil. units, beating expectations for a 5.0% gain. Single-family units rose by nearly 10%, with condos/co-ops up over 6%. Sales growth was positive in every region—the Northeast led with double-digit gains, with the three others up 5-10%. This was the highest level since the mid 2000’s—arguably around the peak of housing activity pre-financial crisis. There is no doubt that housing has been on a strong recovery trajectory, although held back to perhaps its potential by continued scarcity in homes in certain cities. (Average time on market of 21 days is a record, in terms of its brevity.) This has been complicated a bit by a reported flight from cities to suburbs during the pandemic, both for more home office space and skepticism about densely-populated neighborhoods, but the longevity of these reactions is yet to be determined. A vaccine or other end to the pandemic may put a damper on the trend for buying slightly larger homes in suburban areas, but that remains to be seen.
(0) Housing starts for September reversed course from the prior month by rising 1.9% to a seasonally-adjusted rate of 1.415 mil., although it fell short of expectations for a 3.5% increase. Single-family starts rose by over 8%, while those for multi-family declined by -16% in the month. Regionally, the Northeast saw a dramatic monthly increase of 67%, while starts in the Midwest fell -33%—the South and West saw more tempered low-single-digit gains. Interestingly, single-family starts are 7% above their pre-Covid peak early in the year, while multi-family activity remains down over -40%. Building permits rose 5.3% to 1.553 mil., above the 1.518 mil. estimate, with single-family up 8%.
(+) The NAHB homebuilder index ticked up another 2 points in October to a new record high, beating expectations calling for no change. The underlying readings for both current sales and future sales increased by several points, while prospective buyer traffic was unchanged for the month. Regionally, the Northeast and West saw substantial gains in homebuilding activity, while the South and Midwest declined a bit. This index continues to bode well for homebuilding activity in the coming months, despite the winter season approaching. The existing inventory of current homes on the market is extremely tight, with short periods on the market, which has exacerbated higher prices in desirable cities (coupled with record-low mortgage rates).
(+) The Conference Board’s Index of Leading Economic Indicators rose by 0.7% in September, which suggested growth, but at a decelerating pace compared to the two months prior. The coincident indicator rose by a mere 0.2% for the month, while the lagging indicator declined by -0.1%. The leading figure was led by an improvement in jobless claims as well as gains in housing permits, while the board expressed concerns over the slowing of growth as well as another rise in Covid cases. Over the past six months, the index rose at an annualized 7.3% rate, which stood in stark contrast to the -14.0% rate of the prior six months (with the March starting/ending points being naturally significant), with strength in several indicators being an example of the widespread recovery over the period.
(+/0) Initial jobless claims for the Oct. 17 ending week fell by -55k to 787k, well below the 870k level expected. Continuing claims for the Oct. 10 week fell by -1.024 mil. to 8.373 mil., well below the 9.625 mil. claims expected. Declines in claims were relatively widespread, including FL, GA, and MI, as well as CA, where actual data was shared for the first time in a month due to a case backlog. Initial claims appear to be on an improving track, while continuing claims numbers remain stubbornly high with several service industries continuing to run at well below peak levels.
(0) The Fed Beige Book for Sept. and early Oct. described activity as ‘slight to modest’. Under the hood, retail sales seemed to level off a bit, coupled with lower auto sales, due to tighter inventories. Employment appeared to be improving, but at a gradual pace, mostly in the manufacturing segment, although concern for childcare and health-related concerns continued to weigh on jobs with less flexible schedules. As seen in other monthly data, manufacturing activity broadly moved at a moderate pace. Housing markets are seeing steady demand for both new and existing structures, which has also resulted in an increase in demand for bank loans. (At the same time, banks remained worried about potentially rising delinquency rates, which have yet to occur meaningfully.) On the negative side, drought conditions in a few states have weighed on agricultural conditions, and restaurants remain concerned about the impact of colder weather on outside seating arrangements and business impact from Covid. Prices were described at rising modestly, with increases able to be passed on to consumers in some cases but not all.
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.