Weekly Market Commentary - December 21, 2020

Economic Data Watch and Market Outlook

Risk assets resumed their holiday season rally, as progress on a fifth COVID-19 stimulus package and vaccine hopes pushed markets higher. This past week once again proved that science definitely triumphs politics when it comes to producing results. The first doses of the Pfizer-BioNtech vaccine were administered to US healthcare workers on Monday, and it is estimated one million people in four countries were inoculated. This was welcome news to the markets, as new COVID-19 cases in the US rose by a record 1.5 million last week, and new lockdowns and restrictive measures were implemented in California, New York, Germany, and Japan. Economically, we are seeing a worsening of conditions, such as the rise in US jobless claims, which hit 885,000 last week versus the estimate of 818,000. As Fed Chairperson, Jerome Powell stated last week at the year’s final FOMC meeting, the central bank has done what it can, now it is up to Congress to step up. After months of bickering, Senate Majority Leader Mitch McConnell stated a deal “appears to be close at hand”, mid-week. House and Senate leaders appear to have coalesced around a $900 billion package that provides stimulus checks, supplemental UE insurance, small business aid and funds for vaccine distribution. The contentious issues regarding state and local government aid and business liability protection will be part of another bill. Political watchers anticipate congress will work over the weekend to finalize the relief bill, which should then be passed by the Congress and signed into law by President Trump before year-end.

As we enter next week’s holiday shortened trading sessions, the continuation of the annual Santa Claus rally will be highly news dependent. With many equity indices at or near record highs, valuations stretched, and several put/call ratios at extreme levels, markets will need the hopes for a successful COVID-19 vaccine and additional US stimulus to come true. The bull run in risk assets can take us to year end, as long as Congress passes the new stimulus package and there are no negative issues/ reactions to the continued distribution and usage of the vaccine.

In turning to the coming week’s economic calendar, a short holiday week will be jammed with housing, consumer confidence and personal spending data. We begin on Tuesday with the final reading of Q3 US GDP, which is expected to be revised up from 33.1% to 33.2% saar. The small rise is due to positive revisions for personal consumption, residential investment, government spending and business inventories. Also, on Tuesday the Conference Board Consumer Confidence Index is estimated to have risen 3.9 points to 100.0 for December.

On Wednesday, Consumer Spending is projected to drop by -0.8% in November, as the recent surge in new COVID-19 cases and colder weather have negatively impacted retail and auto sales. The PCE price index is expected to increase by 1.1% on an annualized basis in November, while the core PCE deflator is seen to have risen by 1.3%. The employment report is projected to show a 0.5% gain in wages and sales in November, an increase that has been boosted by Lost Wages Supplemental Payments in October.

New Single Family Home sales are estimated to have eked out a 0.1% increase to 1 million units saar for November. Closing out week Wednesday is US Durable Goods orders for November, which is projected to jump by 0.7%. The rise is supported by a rise in aircraft and motor vehicle orders.

The Week In Review

U.S. Equities

US equity markets rallied higher on the week as investor sentiment was boosted by hopes for a new US stimulus package and distribution of the first doses of the Pfizer/BioNTech COVID-19 vaccine.

US Index Performance

Dow Jones +0.46% MTD +1.96% YTD +8.19%
S&P 500 +1.29% MTD +2.51% YTD +16.88%
Russell 2000 +3.09% MTD +8.33% YTD +19.60%
NASDAQ +3.05% MTD +4.56% YTD +42.16

Drivers: I) Congress passed a two day stop gap funding bill on Friday night, avoiding a government shutdown and extended negotiations for a new $900 billion stimulus package. House leaders expect a bill to be completed and a vote taken on Sunday. The new bill would provide $300 billion to small business, a $600 direct payment, $300 per work in federal UE benefits, a renewal of state benefits and funds for COVID-19 vaccine distribution.

II) For November, US Industrial Production firmed by 0.4% as a number of sub-categories beat expectations. Manufacturing output jumped by 0.8%, while there was a weather-related decline in output from utilities which fell by -4.3%. The report shows industrial production has increased by 14.0% from its recent lows but remains below its February reading by 5.0%. Manufacturing is up 21.0% from the lows but is down 4.0% from February.

III) November’s Retail Sales dropped by -1.1% which was below the Street consensus estimate of -0.3%. The decline in November follows the downtick of -0.1% in October. The second wave of new COVID-19 cases is curtailing consumer spending and overall economic growth. The week beginning to the holiday shopping season has economists predicted a drop of -0.8% in real consumption in November.

IV) The US housing market remains strong as mortgage rates remain at historic low levels (30-year mortgage 2.67%). This helped Housing Starts in November to rise by 1.2% to 1.547 million units, while permits increased by 6.2% to 1.639 million units. The starts for single family units continued their solid showing, rising by another 0.4% in November and permits jumping by 1.3%. Housing is strong despite the recent slowdown in other areas.

V) Equities Month to Date are higher with Small-Cap, Growth, Energy, and Technology leading equity price performance. The laggards for the period are Large-Cap, Value, Utilities and REITs.

Capitalization: Large Caps +3.14% (YTD +19.70%), Mid-Caps +4.37% (YTD +16.75%) and Small Caps +8.33% (YTD +19.60%). Style: Value +5.76% (YTD +2.24%) and Growth +6.32% (YTD +20.91%). Sector Groups: Technology +3.91% (YTD +41.22%), Information Technology +4.18% (YTD +40.75%), Communication Services +3.71% (YTD +27.98%), Consumer Discretionary +1.56% (YTD +28.51%), Materials +1.65% (YTD +19.58%), Healthcare +2.94% (YTD +12.30%), Industrials +1.02% (YTD +10.81%), Consumer Staples +1.52% (YTD +9.97%), Utilities -0.85% (YTD -1.02%), REITs -0.23% (YTD -3.82%), Financials +2.23% (YTD -5.39%) and Energy +7.03% (YTD -30.91%).

European Equities

The MSCI Europe Index rose on the week, with investors hopeful that negotiations regarding a new US stimulus package and “Brexit” would come to positive conclusions.

Drivers: I) The seemingly endless negotiations regarding “Brexit” hit a critical point, as the EU and UK are fast approaching the December 31^st deadline. As of Friday, EC President Ursula von de Leyen cited worries over the main issue concerning fishing rights, and UK Prime Minister Boris Johnson warned of a potential “no-deal” outcome. The EU is insisting on a deal by Sunday and ratification of the agreement before year end.

II) Euro-zone Industrial Production for October posted a strong gain of 2.1% month over month. Even with the strong monthly rise, IP remains about 4.0% below the pre-COVID 19 level seen in January and February. The latest IP gain follows the sharp increase in October of 9.5% on an annual basis, above the Q3 level. It will be interesting to see how tighter restrictions in November will affect IP across the region.

III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +2.49% for the week (MTD +4.06% YTD +4.73%).

Asian Equities

Asian equity markets were primarily higher on the week, as stocks rose on hopes for a new US COVID-19 rescue package and the Feds extension of its accommodative monetary policy. The DJ Asia Index was higher by +0.59% for the week, (MTD +3.46% YTD +7.56%).

Drivers: I) In China, the economic recovery remains on solid ground, as November Retail Sales ex-autos rose by 4.1% on an annualized basis (1.4% m/m). The strong gains were across several categories, with discretionary spending increasing, while sectors adversely affected by the pandemic, such as spending in restaurants and for catering seem to be bottoming, as they dropped by only -0.6% on an annualized basis.

II) In Japan, the BOJ’s November reports for real exports jumped higher for a sixth month in a row, increasing by 3.7% m/m. Exports during October to November came in at an average 59.9% on an annual basis, above the level seen in Q3. Demand has risen from the EU, while demand from the US, China and Asia ex-China fell. These readings portend upside potential for GDP, but this may be offset by the recent drop in global demand.

III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei rose by +0.42% (MTD +1.25% YTD +15.18%), the Hang Seng Index was lower by -0.05% (MTD +0.57% YTD -5.58%) and the Shanghai Composite advanced by +1.43% (MTD +0.09% YTD +11.30%).

Fixed Income

Treasury yields rose last week as optimism grew regarding the potential for additional US fiscal stimulus, and despite the recent multi-week rise in jobless claims.

Performance: I) The 10-year Treasury yield was higher last week ending at 0.946% up from 0.897%. The 30-year yield rose last week finishing at 1.693% climbing from 1.625%.

II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index fee by -0.08% last week, MTD -0.22% and YTD +7.12%. The Bloomberg Barclays US MBS TR was higher at +0.19% last week, MTD +0.13% and YTD +3.78%. The Bloomberg Barclay’s US Corporate HY Index rallied higher by +0.33% for the week, MTD +1.30% and YTD +6.50%.

Commodities

The DJ Commodity Index advanced last week by +4.54% and is up month to date +5.09% (YTD +12.96%). Commodities prices were higher, as industrial metals led by a rally in iron ore and copper were boosted by the continued recovery in China’s PMI and overall economy which are now approaching pre-pandemic levels.

Performance: I) The price of oil rose last week by +5.41% to close at $49.08 and is higher month to date by +8.24% (YTD -19.62%). Oil prices were higher for its seventh consecutive week on hopes that a new US stimulus package and a rollout of the COVID-19 vaccine will lift the demand for energy.

II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was lower by -1.16% ending at 89.92 for the week (MTD -2.12% YTD -6.71%). The USD continued its downward trend, as markets believe the end of the pandemic may be nearing with the release of the COVID-19 vaccine and on news the Fed will continue its accommodative monetary policy over the next several years.

III) Gold was higher last week, rising for a third straight week, as inflation expectations have risen based on the potential for more US stimulus, extension of low rates policy by the Fed and the massive increase in the government debt. Gold rose in price by +2.35% last week, climbing to $1886.8 (MTD +5.94% YTD +23.87%).

Hedge Funds

Hedge fund returns in December are higher with all of the core strategies Equity Hedge, Event Driven, Macro/CTA, Relative Value and Multi-Strategy positive for the month.

Performance:

The HFRX Global Hedge Fund Index is higher at +1.63% MTD (+5.96% YTD).
Equity Hedge has advanced by +2.24% MTD (+3.22% YTD).
Event Driven is up MTD +1.47% (YTD +8.14%).
Macro/CTA has risen by +2.13% MTD (+3.44% YTD).
Relative Value Arbitrage is higher by +0.83% (+7.82% YTD).
Multi-Strategy is up MTD by +0.76% (+7.18% YTD)

Data Source: Haver Economics, Standard & Poor’s, HFR, Bloomberg, Morningstar and FactSet

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