Economic Update 8-31-2020
- Economic data for the week included higher than expected durable goods orders, continued strength in house prices and new home sales, and largely stable elevated levels of jobless claims.
- Global equity markets gained last week upon hopes of Covid therapeutics and a ramped-up vaccine timeline, as well as decent economic news. Bonds lost ground as outflows caused interest rates to tick higher. Commodities were mixed, despite spikes in natural gas prices due to hurricanes affecting the Gulf Coast.
Nearly all U.S. sectors gained ground last week, led by communications, technology, and financials, which were all up over 4%. Energy, consumer staples, and utilities were the laggards, with the latter being the only down performer. In addition to the Fed’s more accommodative stance rolled out last week, equities have been reacting favorably to developments regarding Covid treatments and potential vaccine progress.
Prior to Monday, the FDA issued emergency use authorization for the use of convalescent plasma for Covid treatments (although the dataset used was widely criticized as being incomplete). Covid infection rates continue to run at a high level in both the U.S. and other countries globally, while mortality rates have been stabilizing or declining, which appear to reflect better treatment techniques and therapies—some accepted and some controversial. Antibody-containing blood plasma from recovered Covid patients represent one of these discussed therapies, although the effectiveness and duration of protection remains in debate. An accelerated timeline for vaccine approval also boosted economically-sensitive sectors, particularly segments such as airlines, despite the viability of such a strategy remaining in doubt.
The 30-stock Dow Jones Industrial Average is experiencing its biggest shake-up in nearly a decade, largely in response to Apple’s 4-for-1 stock split. Being a price-weighted index (one of the few of its kind), the DJIA felt the need to readjust sector weightings in a continual effort to reflect the modern economy. This week, Exxon Mobil, Pfizer, and Raytheon are out, while Salesforce.com, Amgen, and Honeywell International are in. We probably don’t need to provide another reminder that the Dow is a very unusual index. It’s essentially a historical relic with history going back to 1896, and uses an unusual construction approach as computers didn’t exist and hand calculations weren’t able to do much better at that time—and it’s stuck with us for legacy reasons. Nevertheless, news outlets continue to display it prominently, so it continues to be tracked closely by many, despite its somewhat arbitrary construction of ‘leading’ companies. The irony is that Exxon was the largest company in the world not even a decade ago—how quickly things evolve.
Foreign stocks also gained last week, with emerging markets broadly outperforming developed. Further government stimulus in Europe, in addition to stronger global sentiment around vaccine development continued to serve as catalysts—as did a weaker dollar last week. The health-related resignation of Japanese Prime Minister Shinzo Abo, in power for the past eight years, rattled markets momentarily, but not for long, as accommodative policies are likely to be continued.
U.S. bonds fell back as flows moved away from fixed income and toward equities, causing interest rates to tick higher, upon stronger economic news and despite a continued dovish Fed. High yield and bank loans were the exceptions, with positive results. Foreign bonds were mixed, as a weaker dollar pushed emerging market local bonds higher, while other non-U.S. debt was little changed.
Commodities were mixed, with higher prices for agriculture and energy offset by declines in precious metals as real interest rates rose. The price of crude oil rose minimally, by about a $1 to a shade under $43/barrel, while natural gas prices shot up 15%. Hurricanes Marco and Laura have affected the Gulf Coast in rare back-to-back fashion, resulting in a shutdown of oil/gas drilling and transportation activity in the region.
|Period ending 8/28/2020||1 Week (%)||YTD (%)|
|BBgBarc U.S. Aggregate||-0.51||6.60|
|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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