Economic Data Watch and Market Outlook
Financial markets have confounded strategist like me for decades, and last week was no exception. We are supposed to wade through the short-term uncertainty and noise, and make investment decisions based on our economic and corporate earnings outlook. But the 2020 Presidential Election generated greater short-term uncertainty than previous elections, because once again the political polls proved to be completely inaccurate in their prediction of a “blue wave” and a sizable win by former Vice President Biden. So, the de-risking prompted by concerns from strategist and investors that a one-party majority could bring wholesale policy changes, sent global markets careening downward the previous week. Market direction turned positive once investors discerned from actual election results that control of the White House and Congress would be divided. A government divided the markets surmised, would still approve more stimulus, keep present healthcare plans in place, lessen the scrutiny of the social media giants, and revive globalization. Markets posted their strongest weekly gains since April, were also helped by strong economic data, corporate earnings, and news hopes for a COVID-19 vaccine. With the Presidential election, several Senate and Congressional seats still undecided, markets will hopefully be comforted when the elections are finalized.
As we enter next week’s trading sessions, investors will welcome a less frantic week, as the corporate earnings season will be winding down and the economic calendar will be light. Markets though will on the lookout for any clues regarding potential changes to global monetary policy, as the ECB will be hosting a virtual forum with the US Federal Reserve, Bank of England and the European Central Bank all participating. In the US, the corporate earnings calendar will have McDonald’s, Advanced Auto Parts, Cisco Systems, and Walt Disney as the prominent companies reporting. Thus far, with 89% of the S&P 500 having reported (445 companies), 86% and 79% respectively have beaten their Q3 earnings and revenue estimates according to FactSet. Earnings have seen a -7.5% decline which far exceeds the end of Q3 estimate of -21.2%. Leading earnings growth are Healthcare (+12.8%), Consumer Staples (+4.0%) and Information Technology (+3.6%).
In turning to the coming week’s economic calendar, US inflation data will be the main releases with both CPI and PPI for October reporting. On Thursday, CPI for October is estimated to have risen by 0.1%, while the core index is projected to increase by 0.16%. Energy prices have recently fallen by 0.2% and food prices have been stable.
October’s PPI on Friday is estimated to have climbed by 0.2%. The rise in PPI is projected to be driven by a rise in energy of 1.1% and a modest 0.2% increase in food prices. Closing out the week is the University of Michigan consumer sentiment index which is expected to drop by 1.8 points to 80. Sentiment has declined recently due to the spread of COVID-19 and delayed results from the US elections.
The Week In Review
U.S. Equities
US equity markets posted their strongest one-week gains since April, as the projected divide in the US government was positively received as investor expect more moderate policies going forward.
- Dow Jones +6.89% MTD +6.89% YTD +1.13%
- S&P 500 +7.36% MTD +7.36% YTD +10.33%
- Russell 2000 +6.89% MTD +6.89% YTD -0.35%
Drivers: I) The September reading of the ISM Manufacturing survey handily beat Street expectations, rising from 55.4 to 59.3. The survey reached its highest level in over two years, and several of the manufacturing indicators have recently showed marked improvement. The manufacturing gains were seen in new orders (53.9), output (52.3) and employment (51.9).
II) The ISM Non-manufacturing survey fell in October from 57.8 to 56.6. The decline exceeded Street expectations, as a pull back in the underlying components weakened from September’s strong results.
Weakness was seen primarily in business activity (63.0 to 61.2), new sales (61.5 to 58.8) and employment (51.8 to 50.1).
III) The jobs report for October showed a solid increase in nonfarm employment of 638,000, which was positive despite the drop in the number of Census workers which pulled an estimated 147,000 from the jobs number. On the plus side was the sharp rise in private employment of 906,000 versus the gains seen in September. The dramatic drop in the unemployment rate from 7.9% to 6.9% far exceeded expectations. The UE rate dropped despite the rise in the labor force participation rate of 0.3% to 61.7%.
IV) The factory goods reports for September showed new orders rose by a strong 1.1%, while shipments increased by 0.3% and inventories were flat. The data for new orders and shipments were on par with Street expectations, and core capital goods were essentially unchanged. The disappointing result was the inventory data in light of the recent releases showing historical low inventories versus sales.
V) Equities Month to Date are higher with Large-Cap, Growth, Tech, and Information Technology leading equity price performance. The laggards for the period are Small-Cap, Value, Energy and Utilities.
Capitalization: Large Caps +7.53% (YTD +11.65%), Mid-Caps +6.92% (YTD +5.07%) and Small Caps +6.89% (YTD -0.35%). Style: Value +4.96% (YTD -13.54%) and Growth +7.53% (YTD +7.49%). Sector Groups: Technology +9.75% (YTD +33.89%), Information Technology +9.76% (YTD +32.65%), Consumer Discretionary +6.86% (YTD +22.93%), Communication Services +8.45% (YTD +19.20%), Materials +7.61% (YTD +12.52%), Healthcare +8.28% (YTD +9.47%), Consumer Staples +4.63% (YTD +5.42%), Utilities +2.82% (YTD +1.91%), Industrials +7.24% (YTD +1.47%), REITs +4.41% (YTD -5.92%), Financials +4.56% (YTD -17.21%) and Energy +0.79% (YTD -49.24%).
European Equities
The MSCI Europe Index soared higher last week, as the early results showing a democratic White House offset by a Republican senate would stymie the policy proposals of some of the more progressive democratic party members.
Drivers: I) The sharp spike in new COVID-19 cases in Europe have led to new restrictions being implements on a country by country basis. Though some countries differ in regard to the stringency of the new measures, there is uniformity as to restrictions on social gatherings and events, remote work and schooling and workplaces such as factories remaining open. Differences in policies are in place regarding restrictions on social mobility, hospitality, leisure and arts events and non-essential retail stores. The new lockdowns will cause November GDP to fall.
II) In September, German industrial production rose by 0.7% which has caused the quarterly results to surge by 50% quarter over quarter on an annualized basis. Despite the strong showing in September, industrial production is still 8% below the average seen in January and February pre-coronavirus. On a month over month basis, manufacturing output grew by 2%, construction output by 1.5% but energy output fell by 3.4%.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +8.99% for the week (MTD +8.99% YTD -6.26%).
Asian Equities
Asian equity markets rallied sharply last week, as the US election result should led to a split government between Republicans and Democrats, potentially setting up a pro-growth agenda of low taxes and further fiscal stimulus. The DJ Asia Index advanced by +6.84% for the week, (MTD +6.84% YTD +0.18%).
Drivers: I) In China, the Caixin/Markit manufacturing PMI increased by 1.5 points to 57.0, which is its highest reading since December 2010. New exports orders were a disappointment as it dropped for the first time after a five consecutive month increase, falling by 3.4 points to 51.0. Looking ahead, there are concerns that the new surge in COVID-19 cases in Europe and implementation of new area lockdowns, will cause external demand for Chinese exports to decline.
II) In Japan, the October Market PMI was revised higher by 0.7 points to 48.7. The rise in PMI supported the belief that the recovery in the services sector was continuing, as mobility has climbed back near pre-COVID 19 levels.
The index of activity remained below the 50-expansion level, implying that both manufacturing and services continued to lag due to coronavirus lock-down measures, but are slowly recovering.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei rose by +5.87% (MTD +5.87% YTD +4.68%), the Hang Seng Index was higher by +6.66% (MTD +6.66% YTD -8.38%) and the Shanghai Composite advanced by +2.72% (MTD +2.72% YTD +8.59%).
Fixed Income
Treasury yields fells last week as the division of government between the Democrats and Republicans should lead to a more moderate amount of new fiscal stimulus to battle COVID-19.
Performance: I) The 10-year Treasury yield was lower last week ending at 0.815% down from 0.879%. The 30-year yield fell last week finishing at 1.606% declining from 1.664%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose +0.49% last week, MTD +0.49% and YTD +6.83%. The Bloomberg Barclays US MBS TR was lower at -0.01% last week, MTD -0.01% and YTD +3.57%. The Bloomberg Barclay’s US Corporate HY Index rallied higher by +2.11% for the week, MTD +2.11% and YTD +3.27%.
Commodities
The DJ Commodity Index rose last week by +2.20% and is up month to date +2.20% (YTD +0.23%). Commodity prices were higher last week as interest rates and the USD declined.
Performance: I) The price of oil climbed higher last week by +4.95% to close at $37.49 and is higher month to date by +4.95% (YTD -38.60%). Oil prices rose last week, following the lead of rising equity prices which jumped on the prospects of a divided US government that could follow a low tax and higher stimulus agenda.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was lower by -1.75% ending at 92.24 for the week (MTD -1.75% YTD -4.30%). The USD saw its sharpest drop since March and reached a nine-week low, as risk assets rallied strongly on the back of a divided US government after last week’s early presidential and congressional election results.
III) Gold jumped higher last week, helped by the decline interest rates and USD, as well as concerns over the new wave of COVID-19 cases in the US and Europe. Gold jumped in price by +3.87% last week, rising to $1951.5 (MTD +3.87% YTD +28.12%).
Hedge Funds
Hedge fund returns in November 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 +1.50% MTD (+2.93% YTD).
- Equity Hedge has advanced by +2.21% MTD (-1.35% YTD).
- Event Driven is up MTD +1.37% (YTD +5.78%).
- Macro/CTA has risen by +1.49% MTD (+1.07% YTD).
- Relative Value Arbitrage is higher by +0.89% (+5.47% YTD).
- Multi-Strategy is up MTD by +0.81% (+4.99% YTD).
Data Source: Haver Economics, HFR, Bloomberg, Morningstar and FactSet
This report discusses general market activity, industry, or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. It is for informational purposes only and does not constitute, and is not to be construed as, an offer or solicitation to buy or sell any securities or related financial instruments. Opinions expressed in this report reflect current opinions of Clearbrook as of the date appearing in this material only. This report is based on information obtained from sources believed to be reliable, but no independent verification has been made and Clearbrook does not guarantee its accuracy or completeness. Clearbrook does not make any representations in this material regarding the suitability of any security for a particular investor or the tax-exempt nature or taxability of payments made in respect to any security. Investors are urged to consult with their financial advisors before buying or selling any securities. The information in this report may not be current and Clearbrook has no obligation to provide any updates or changes.