LSA Connect

Economic Update 11-30-2020

• In a shortened holiday week, economic data included stronger housing prices but a decline in sales, mixed personal income/spending results, and lower consumer sentiment as Covid cases again pick up.

• U.S. and foreign equity markets both experienced gains last week, as positive sentiment continued. Bonds were mixed, with U.S. corporates and foreign debt also gaining. Commodities were mixed, with cyclically-sensitive energy and industrial metals seeing gains, offset by declines in precious metals.

Economic Update 11-23-2020

• Economic data for the week included increases in retail sales, industrial production, and several housing metrics; a pair of regional manufacturing indexes decelerated but remained solidly in expansion.

• World equity markets moved in different directions last week, with U.S. stocks declining and foreign stocks rising. Bonds fared well, as interest rates globally declined. Commodities also gained along with higher crude oil and industrial metals prices.

U.S. stocks were mixed to lower last week, as early excitement over more good Covid vaccine news was offset by sharply rising cases across the country, dampening consumer and business activity (a high profile example was the physical shutdown of New York City schools—a close reminder for Wall Street traders). By sector, returns were mixed, with energy leading the pack, up several percent, with oil prices rebounding; this was followed by materials and industrials, which continued to represent the cyclical group. Lagging with negative returns were traditional defensives utilities, health care, and real estate. 

As was the case the prior week with Pfizer, positive news of Moderna’s mRNA-based Covid vaccine showed a high efficacy rate (95%) pushed stocks higher to begin the week. Additionally, it appears to be easier to store and transport (in standard refrigerator temperatures) than the Pfizer vaccine (needing far colder conditions, which create complications). The U.S. government has already pre-purchased 100 million doses, in part of an effort of world governments to ‘lock up’ access to vaccines, typically during the development process. Along with this announcement, Pfizer also adjusted their vaccine effectiveness rate upward from 90% to 95%, and applied for FDA emergency use authorization. As expected, the most positively affected stocks were those in the travel and entertainment groups.

Tesla will be added to the S&P 500 stock index, as committee members were hesitant to do for an extended period due to the company’s lack of profitability. Now that some profits have come through, S&P appears more willing to take the next step. It’s important to remember that even ‘passive’ indexes have at least one ‘active’ component—and sometimes several. Inclusion in the S&P series of indexes requires committee approval, after companies have met baseline metrics for profitability and liquidity, making this an ‘active’ decision. This is in contrast to indexes such as the Russell series, where inclusion is dependent on size alone, although original ‘style’ criteria were decided by committee members at some point.

Foreign stocks earned positive returns, bucking the weekly result in the United States—Japan and the emerging market groups led all others. Unsurprisingly, more commodity-oriented nations Brazil and Mexico led the way as hopes for 2021 improvement grew. Conditions in developed markets, such as Europe, appeared driven to a greater degree by vaccine hopes than current lockdowns—perhaps due to these occurring prior to those in the U.S. However, sentiment has been held back by the fact that a Eurozone fiscal aid package is being held up by vetoes by Poland and Hungary. In Asia, optimism followed the signing of the Regional Comprehensive Economic Partnership (RCEP) tariff-reduction trade pact, by 15 countries, from China to Australia.

U.S. bonds earned positive returns as rates ticked lower across the yield curve. Investment-grade corporates outperformed treasuries a bit, as spreads also narrowed during the week. A weaker U.S. dollar helped boost the returns for both developed and emerging market sovereign debt, earnings gains of up to a percent for the week.

Commodities broadly gained on the week in most major groups, led by increases of several percent each in industrial metals and energy, while precious metals declined slightly. Cyclical economic recovery hopes continue to remain high with the arrival of a vaccine. The price of crude oil rose by 5% to around $42.50/barrel, while natural gas declined by over -10%. OPEC and others have delayed a planned production increase in early 2021, which would have added to already high supplies.

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. 

FOR ADVISOR USE ONLY – NOT FOR DISTRIBUTION TO THE PUBLIC WITHOUT PRIOR APPROVAL FROM YOUR RESPECTIVE FIRM’S COMPLIANCE DEPARTMENT

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.

Fed Note:

The Federal Reserve Open Market Committee took no action at their early November meeting, keeping policy unchanged (fed funds rate at 0.00-0.25%), with ongoing stimulative bond purchases and liquidity facilities staying in place to combat the negative economic impacts of the pandemic. There were no dissents.

Although Fed comments were a bit more bearish as of late, the formal statement was little changed in content, with economic growth and employment prospects held back by the pandemic. Descriptions of ‘continued to recover’ replaced ‘picked up,’ and overall financial conditions ‘remain accommodative,’ replaced ‘have improved in recent months.’ There were some thoughts that the Fed might add additional stimulus buying of some sort, similar to the enhancements by the Bank of England this week. However, unlike the U.K., the Fed has continued to express hesitation to even consider the concept of negative rates.

As for the primary mandates:

Fed Note:

The Federal Reserve Open Market Committee took no action at their early November meeting, keeping policy unchanged (fed funds rate at 0.00-0.25%), with ongoing stimulative bond purchases and liquidity facilities staying in place to combat the negative economic impacts of the pandemic. There were no dissents.

Although Fed comments were a bit more bearish as of late, the formal statement was little changed in content, with economic growth and employment prospects held back by the pandemic. Descriptions of ‘continued to recover’ replaced ‘picked up,’ and overall financial conditions ‘remain accommodative,’ replaced ‘have improved in recent months.’ There were some thoughts that the Fed might add additional stimulus buying of some sort, similar to the enhancements by the Bank of England this week. However, unlike the U.K., the Fed has continued to express hesitation to even consider the concept of negative rates.

As for the primary mandates:

Economic growth: Last week, 3^rd quarter U.S. GDP increased by an annualized 33%, which nearly mirrored the -31% decline of Q2. This is the ‘V-shape’ many economists have been discussing, although it doesn’t reflect the broad nuances between quickly recovering sectors (such as industrials/manufacturing) and service groups (restaurants, travel, and leisure). Expectations for Q4 remain higher than average, but far less dramatic, at 3-5% or so—largely dependent on the path of virus cases, any additional lockdowns, and stimulus that could surface in coming months to boost consumption.

Inflation: The year-over-year Consumer Price Index reading from September showed a rise of 1.4% (headline) and 1.7% (core, ex-food and energy). These relatively low inflation levels have prompted the Fed to adopt a new ‘average inflation targeting’ policy. This allows for shortfalls in inflation (like we have now, under 2%) be potentially offset by letting inflation run ‘hot’ (above 2%) for a time—assuming the long-term average of 2% will be achieved. However, this hasn’t been tried before, so its effectiveness remains to be determined. One risk is that underlying factors keeping inflation depressed, such as demographics and technological change, could keep inflation readings low for a significant time. How will this affect Fed policy if low inflation becomes persistent and doesn’t bounce back as hoped?

Employment: The labor market has improved, in lockstep with industries that have returned to active operations. Unfortunately, many lower-wage workers, largely in service industries, remain distressed with food services, travel, and leisure closed or under far reduced operation in many areas. Of course, repair in these segments is dependent on the resolution of the pandemic. In the meantime, the Fed has now created more of an asymmetric policy response to labor, noting that it will focus more on employment shortfalls than it will on pulling back on easing should the economy reach full employment. This more dovish policy also raises questions about long-term effects, as does any movement away from symmetric policy.

A national election shouldn’t have an impact on Fed policy directly, but it can obviously alter the backdrop. The lack of a ‘blue wave,’ and higher probability of retention of the Senate by Republicans, would result in more of a status quo scenario of split government. This would reduce the likelihood of more extreme policies, such as tax increases, an anti-corporate regulatory environment, or massive spending—all of which were concerns of financial markets.

Shorter-term sentiment has also been swayed heavily by stopgaps like fiscal stimulus, which Congress is expected to revisit again now that the campaign season is over. But there are no guarantees, as worst-case estimates were calling for another stimulus plan to be agreed upon as late as early 2021. The amount of stimulus is also to be determined, as a ‘blue wave’ scenario was expected to call for up to $2-3 tril., while a status quo package could struggle to exceed $1 tril. The Federal Reserve, by its own admission, has largely reached the boundaries of what it can accomplish through monetary policy, with more than a few hints from officials pointing to Congressional stimulus as the best vehicle for aid to the broader U.S. population. The risk, of course, is that smaller stimulus could result in more tempered growth in the near-term—and perhaps lesser need for the Fed to raise rates more quickly than they first anticipated (relative to the massive stimulus proposed under a ‘blue wave’ scenario, for example, which could have moved up the Fed’s timetable).

The seemingly dramatic V-shaped recovery growth seen in Q3 is likely to morph into a slower trajectory of recovery into Q4 and early 2021, although focus remains on the timing of a vaccine of some sort and its public distribution (which could end up being a full-year 2021 event). The longer a downturn lasts, the greater the risks of permanent economic damage, so a recovery of faster speed is of great interest. Financial markets appear to be pricing in a 2021-22 solution to the Covid problem, although volatility has quickly surfaced when this premise has been threated, such as a winter second wave, which has already seemed to hit Europe. As it stands, low interest rates have pulled down expected returns for cash and fixed income, forcing investors to take on credit or equity risk. While headline market multiples remain somewhat elevated, due to the success of several large-cap tech and communications companies (which account for about 40% of the index at this point), lower valuations for other segments remained tied to their more cyclical nature and less certain prospects, but also wider recovery opportunities ultimately.

Economic Update 11-02-2020

• Economic data for the week included U.S. GDP for the 3^rd 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.

Economic Update 10-26-2020

• 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.

Economic Update 10-19-2020

• Economic data for the week included strength in retail sales and consumer sentiment, regional manufacturing reports were mixed, while industrial production fell back. Producer and consumer inflation ticked up slightly, while jobless claims remain challenged.

• Flattish U.S. equity markets outperformed foreign stocks, which declined last week, along with mixed political and economic news. Bonds were also mixed, with slightly positive returns domestically, coupled by weakness abroad in keeping with a rising dollar. Commodities were similarly mixed, with agriculture and energy seeing gains.

Economic Update 10-05-2020

• 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.