Economic Update 11-02-2020
- 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.
|Period ending 10/30/2020||1 Week (%)||YTD (%)|
|BBgBarc U.S. Aggregate||-0.04||6.32|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
Sources: LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. 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.
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