Economic Update 11-16-2020
- In a light week for economic data, releases included slight increases in producer and consumer prices, slow improvements for labor, and weaker consumer sentiment.
- Global equity markets rallied strongly upon the more solidified U.S. election results from the prior week, and the announcement of promising Covid vaccine trials. Bonds fell back in keeping with higher interest rates, and foreign bonds from a stronger dollar. Commodities also rallied, with oil prices following expected improvement in petroleum demand.
U.S. stocks shot up sharply Monday morning by over 3%, upon a combination of a more decisive Joe Biden Presidential victory, and likely perhaps even more so by reports that Pfizer’s preliminary findings from its mRNA-based Covid vaccine that has proven 90% effective. (This is quite high for a vaccine of any type, let alone one using new technology. Moderna’s vaccine results, using similar technology, are expected soon.) The week ended with the S&P reaching another record high, as prospects for the future are looking brighter, despite a current setback of surging Covid cases nationwide.
By sector, cyclicals demonstrated the strongest performance last week, as expected by the economic improvement anticipated by test results for an effective vaccine. Energy surged over 15%, followed by strong gains for financials and industrials of 5-10%. Real estate also rose 5%, despite rising interest rates, but offset by the expected goods news on tenant fundamentals brought on by economic improvement and removal of a large input of uncertainty from retail. The weakest results were from technology, which lost ground last week, counter to this year’s trend, and communications and consumer discretionary stocks, which gained minimally. This knee-jerk rotation to ‘value’ is not surprising, but it may be premature to call a turn in the cycle completely yet. Small cap stocks also outperformed large caps, due to their perceived sensitivity to economic conditions (and lower valuations).
Foreign stocks rebounded strongly last week, more so in developed regions Europe and the U.K., which outperformed Japan and the emerging market group. This was perhaps driven by the intensified Covid spread in the former (which has reached new records in some countries), and stronger implied recovery impact from a vaccine. Emerging markets were pulled down by a decline in China, where a major state-owned utility company defaulted on its debt, requiring central bank intervention. This was coupled with a U.S. ban on investment in firms tied to the Chinese military, including several popular telecom firms. Turkey rallied 20% as President Erdogan responded to hopes for a more independent central bank and new economic policy team. Presidential meddling has been blamed for the lack of transparency and less conventional monetary policies implemented by the country in recent years—raising the market volatility of their currency and foreign debt yields.
U.S. bonds retreated last week, as interest rates ticked slightly higher upon hopes for nearer-term economic recovery. However, the 10-year treasury note yield did pull back a bit from approaching the 1.00% level for the first time since March. Longer-duration assets bore the brunt of the decline, with investment-grade corporates outperforming treasuries slightly, although both declined by several tenths of a percent. Floating rate bank loans, on the other hand, gained nearly a percent. Developed market foreign bonds fell sharply, suffering from both rising rates and a stronger dollar, while emerging market bonds earned positive returns along with other risk assets.
Commodities gained as a whole, as hopes for higher demand outweighed the headwind of a stronger dollar last week. Energy, industrial metals, and agriculture rose at least a percent or more while precious metals, known for performance when uncertainty reigns, fell by a few percent. The price of crude oil bounced back by over 8% to just above $40/barrel. Even more so than other risk assets, petroleum has been held back by a lack of consumer and business demand—lessened driving, flying, and general manufacturing. In recent meetings, OPEC recently appeared more committed to containing supply in an effort to sustain or even boost prices further.
|Period ending 11/13/2020||1 Week (%)||YTD (%)|
|BBgBarc U.S. Aggregate||-0.14||6.68|
|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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