Monday Market Review October 5, 2020
Economic data for the week included the final GDP release for Q2, which was little changed. Manufacturing and construction continued to show general expansion trends, although month-to-month data remains mixed. Housing metrics and prices continue to show strength. The monthly employment situation report was positive, but not as strong as expected.
Global equity markets earned positive returns last week, with signs of continued economic improvement as well as ongoing hope for additional stimulus—despite resurgent and persistent Covid infection counts. U.S. bonds were mixed as rates ticked higher, while foreign bonds were helped by a weaker dollar. Commodities fell as crude oil prices continued to be challenged by difficult supply/demand dynamics.
U.S. stocks rebounded for the first time in a month. Better sentiment began Monday morning, as investors applauded the prior weekend comments from Congressional and Treasury leaders surrounding another round of fiscal stimulus. However, the amount championed by House Speaker Pelosi was down to $2 tril. from the initial $3 tril., which was taken positively, as it passed the House. This second plan continues to be worked on behind the scenes, with no concrete announcement prior to an upcoming Congressional recess. Areas of contention appear to be the balance of aid between corporate support and state/local government aid (many of the largest states in need are Democratically-controlled). While the debate earlier in the week appeared to have little market effect, reports of the President contracting Covid pared back some gains by Friday, with information flow about the timing and severity of the illness somewhat unclear.
By sector, financial, consumer discretionary, and utility stocks each gained over 3% to lead last week, while energy suffered another -3% upon weaker crude oil prices. Real estate gained 5%, as one of the week’s leading assets.
Foreign stocks fared similarly to those in the U.S., as Europe and the U.K. outperformed Japan, which ended down slightly. Europe continues to be experiencing a resurgence in Covid cases, prompting possible tighter restrictions in key cities such as Paris, Liverpool, and Madrid. Emerging markets broadly slightly beat out developed. Chinese industrial production profits in August were reported to be up 20%, in a continuation of similar results for the prior month—helping aid investor sentiment for an Asian recovery.
Broad U.S. bond indexes were little changed on net, with a rise in long-term treasury rates holding back government bonds, while corporate bonds fared better with tighter credit spreads. High yield and floating rate bank loans fared especially well for the week. In foreign markets, a weaker dollar helped developed market government bonds earn nearly a percent for the week, with emerging market debt positive, but less robust.
Commodities generally fell back last week, in keeping with declines in the energy sector, while agriculture and precious metals saw gains. The price of crude oil fell by -8% to $37/barrel, while the price of natural gas fell -13%. Since its recovery from ‘zero’ (really, about $12), the price of crude oil has recovered to a range of about $35-45. Recent dynamic continue to be driven by weak demand, yet also slowly rising global production (including additional exports from Libya). The difficulty is that, for many emerging nations, low production results in very low revenues, which exacerbates fiscal budget difficulties already strained by the pandemic. Raising production to sell more oil is the easy fix, but can have a negative effect on pricing if demand isn’t recovering at the same pace—resulting in a difficult loop.
(0) The third and final release for 2nd quarter U.S. GDP was slightly less unnerving than initially feared several months ago, showing a small improvement to -31.4% (up three-tenths from the second estimate a month ago). Declines in personal consumption and residential investment ended up being less severe than the initial estimate, up 1-2% each, although still down dramatically (-33% and -36%, respectively), and added to the upward revision. Other categories were little changed, with revisions downward for exports (down -65%) and government spending (still up 17%). Core PCE inflation was revised up by 0.2% to a quarterly annualized rate of -0.8%, and the year-over-year rate up just a few ticks to 1.0%.
GDP estimates for Q2 by a variety of firms and real-time quant indicators were remarkably accurate, considering the immense size of the decline. For Q3, the Atlanta Fed’s GDPNow measure is estimating growth of 35%, which is in keeping with consensus industry estimates. The New York Fed’s Nowcast, based on statistical relationships from monthly data, is predicting more tempered 14% growth in Q3 and just under 5% in Q4 (then again, it predicted a decline of only -14% for Q2). It is not unusual for growth to bounce back in an extreme way following a severe downdraft. This math is just like that of market movements, such as typical recoveries after bear markets—getting back to prior highs looks like extreme ‘growth’ from very depressed trough levels. In Q4 and into 2021, it is assumed that growth may continue to run at a higher-than-normal rate, but not indefinitely. The ending point for this recovery growth, and regression to the mean back to trend of an annualized 1.5-2.5% remains virus- and vaccine- dependent.
(0) Personal income fell by -2.7% in August, trailing forecasted income calling for -2.5%, as the extra $600 benefit expired, while wages rose by over 1%. Personal spending rose 1.0%, beating expectations by a similar spread of 0.2%, although the prior month spending numbers were revised down. Considering both, the personal saving rate fell by -3.6% to 14.1% for the month. Year-over-year, income and spending are up 5% and down -2% respectively, both heavily altered by the recession and stimulus. August PCE inflation rose by a rounded 0.3% on both a headline and core level, on par with expectations. Year-over-year, headline and core PCE increased by 1.4% and 1.6%, respectively—continuing to run well below the Federal Reserve’s target.
(-/0) The ISM manufacturing survey for September declined by 0.6 of a point to 55.4, falling short of the 56.6 level expected by consensus, but remaining well into expansion territory. The underlying composition was similar, with larger declines in new orders and production, although the final indexes remained expansionary. On the other hand, supplier deliveries and prices paid moved higher and further into solid growth. Employment and inventories rose by several points to just a shade under a neutral 50 reading (neither contractionary nor expansionary).
(+) Construction spending rose 1.4% in August, beating expectations calling for 0.7%, and included several upward revisions for recent prior months. Private and public spending on residential structures experienced increases during the month, while non-residential constructing spending declined by several tenths from both public and private sources.
(+) Pending home sales for August rose by 8.8%, beating expectations calling for 3.1%, and actually reaching an all-time high for the nearly 20-year-old series. The year-over-year rate reaccelerated by several percent to 21%. Sales increased in all four regions, with gains in the West rising 13% and leading the other regions. This measure is somewhat useful in seeing trends for upcoming existing home sales releases, which continue to run at a strong rate.
(+) The S&P Case-Shiller home price index re-accelerated higher by 0.6% in July, beating consensus expectations calling for 0.1%. The year-over-year price change, which tends to be a more helpful indicator, ticked up by 0.4% to 3.9%—continuing to run at a far higher rate than general inflation. For July, prices rose in all cities but New York, with Los Angeles, Portland, Boston, and Seattle all seeing gains of 1.0% for the one month.
(-) The advance edition of the goods trade balance for August saw the deficit expand by -$2.8 bil. to -$82.9 bil., which was wider than the median forecast of -$81.9 bil. Trade volume generally increased for the month as a whole, although goods imports (particularly consumer goods) rose by about $3 bil. more than goods exports (driven by industrial supplies)—accounting for the wider deficit, although the composition was favorable.
(+) The Conference Board index of consumer confidence rose by a sharp 15.5 points in September to 101.8, which exceeded forecasts calling for 90.0. Consumer assessments of present conditions as well as future expectations increased, with the latter a bit more than the former. The labor differential, which measures the ease in finding employment, rose by only a few points. Consumer attitudes do seem to be improving, as lockdowns are less pervasive, although conditions for low wage workers in service industries remain challenged. Equity market recovery over the summer generally has provided a boost to confidence, as this tends to be a lagging indicator.
(+) The final September Univ. of Michigan index of consumer sentiment rose by 1.5 points to a level of 80.4, beating expectations for a flattish 79.0 reading. The current conditions component showed a minor increase, although expectations for the future improved by several points. Inflation expectations for the coming year declined by one tenth to a still-high 2.6%, while expectations for the next 5-10 years rose a tenth to 2.7%.
(+) Initial jobless claims for the Sep. 26 ending week fell by -46k to 837k, lower than the 850k median forecast. Continuing claims for the Sep. 19 week fell by -980k to 11.767 mil., well below the 12.200 mil. level expected. Results were similar when accounted for on a non-seasonally-adjusted basis. A decline in claims occurred in FL, TX, and GA (where re-openings are more pronounced), while MD, NJ, and IL experienced minor increases. Claims obviously remain well elevated in both categories, with partial shutdowns continuing, not to mention the impacts of processing delays and difficulty in measuring such an extreme event. Nevertheless, some improvement has begun to surface.
(+) The ADP private sector employment report for September improved on the prior month, showing a rise of 749k, beating expectations calling for 649k—in addition to a substantial revision upward for the prior month. Services jobs rose by 552k, in trade/transports especially. Goods-producing employment increased by 196k, with manufacturing representing two-thirds of the jobs added.
(0) The employment situation report for September showed a continued pattern of improvement, but not to the level hoped, as seen in the overall deceleration. There continues to be difficulty in calculating actual numbers of those impacted by slowdowns, as the classification between newly ‘part-time,’ ‘furloughed,’ and ‘unemployed’ continue to be very fluid in 2020. But, there does seem to be some improvement; for example, the number of part-time workers doing so for economic reasons fell by nearly -20%.
Nonfarm payrolls gained 661k, but about half the pace of August, and below the median forecast calling for 859k, although positive revisions for prior months were nearly 150k. However, there did seem to be some considerations around seasonality for the education sector, which may cause these to be a bit off from expectations. By segment, gains were seen in leisure/hospitality (318k) and retail (142k) as these industries reopened, while manufacturing also saw a ramping up of activity (66k).
The unemployment rate fell by another -0.5% to 7.9%, beating expectations for only a -0.1% drop. The U-6 underemployment metric also fell substantially, by -1.4% to 12.8%. A drop in the labor force participation rate appeared to be a primary driver. The household survey of employment showed an increase of 275k, although there appeared to be some seasonality issues here as well. The BLS claimed that this gray area likely means the true employment rate is about a half-percent higher than quoted. Average hourly earnings rose by 0.1%, which was about half the forecasted pace and a third of the level of August’s growth. Average weekly hours rose by a tenth to 34.7.
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, National Association of Realtors, 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.