Weekly Market Commentary – September 14, 2020

Economic Data Watch and Market Outlook

As the summer fades into the background, so has the seemingly the inexorable rise in the mega technology stocks.  Tech and tech related companies were a bit of a “wreck” last week, as the NASDAQ Composite closed in correction territory down by -10.0% plus from its September 2nd high.  The tech giant led NASDAQ 100 lost -4.6% with the index swinging by more than 1.00% in every trading session.  The drop saw Apple, Microsoft, and Amazon decline by 4.8% to 7.5% on the week, trimming about $500 billion in market cap from the giants.

Some of the tech sector’s current volatility may be explained by the recent rise in influence of the retail investorSince 2010, the volume of equity trading in the US by retail investors has risen from 10.0% to an estimated 20.0%.  The retail footprint may also be seen in the option’s market, where approximately 75.0% of option buying has been in single stock options with an expiration of two weeks or less.  The investment firms that sell and buy options to facilitate investor orders need to hedge their positions with long or short stock positions, fondly known in the industry as “delta” hedging.   The selling of call options to investors has prompted the Wall Street firms to buy stocks as a hedge.  But when these call options drop like a stone in value due to a decline as seen in Apple, investors will sell the option prompting the investment firms to sell the Apple stock hedge. The pandemic has helped to fuel the rise in popularity of the Robinhood and similar retail trading platforms, as individuals have sought out diversions during the “lock-down”.  But these investors have only seen an up market since March 23rd, so can retail survive through a severe market downdraft?  For now, the retail investor is a growing in influence, and they could exacerbate market and stock price moves up or down.

As we enter next week’s trading sessions, the earnings season will be winding down for Q2 and S&P 500 earnings look to be down -31.9%.  The earnings decline is better than the worse original estimates seen in early July which ranged from -37.0 to -44.0% from FactSet.  As we have seen the NASDAQ Composite and S&P 500 soar by 76.0% and 61.0% respectively from their March 23 lows, the markets need to see a recovery in earnings for further appreciation.  The early Q3 S&P 500 earnings estimate was recently revised upward from $31.78 to $32.62 per share, versus the $35.02 seen in Q3 2019. For calendar year 2021, the early call from FactSet is for a 26.3% increase in S&P 500 earnings.  While we hope these positive earnings projections hold true, market volatility will remain elevated.  The futures market is showing higher volatility levels through December, as markets are concerned about the outcome of the US Presidential election.  Also, in the back of the market’s mind is the possibility an election outcome may stretch out beyond November 3rd, which is why the current VIX is already at an elevated 29.58.

In turning to the coming week’s economic calendar, the FOMC will conduct its September meeting with markets awaiting word of any policy change, and US housing and retail sales data will be front and center.  On Tuesday, we begin with the report for August Industrial Production which is estimated to have risen by 0.1%, led by an increase in utilities output.

On Wednesday, August Retail Sales are projected to rise by 0.6%, a reversal of the sharp decline seen in March and April, but the rate of growth is moderating.  Auto sales and an increase in gasoline prices are expected to lead the way. Closing out Wednesday, the National Association of Home Builders survey is projected to remain unchanged at 78.  The housing market continues to benefit from the tailwind of low mortgage rates.

Closing out the week on Friday, the University of Michigan consumer sentiment index is estimated to have increased by 0.9 points to 75.0 in September.

The Week In Review

U.S. Equities

US equity markets dropped on the week as technology stock fell from their lofty valuations, and the markets were less optimistic the US Congress and White House can agree on another relief bill before November 3rd.

  1. Dow Jones -1.61% MTD -2.61%  YTD -1.34%
  2. S&P 500 -2.49%  MTD -4.50%  YTD +4.80%
  3. Russell 2000 -2.45% MTD -4.10%  YTD -9.40%           

Drivers: I) Senate Republicans could only muster 52 votes for its $500 billion “skinny” relief bill, as no Democrats voted for the bill’s passage.  A total of 60 Yeas are needed for passage. The bill would have provided additional federal aid on top of state jobless benefits, set tougher legal liability standards for suing over contracting COVID-19 and renewed the Paycheck Protection Program. Democrats are standing by their $2.2 trillion offer, and the Republican’s on their $1.3 trillion proposal.

II) US mortgage rates declined to an all time low for the ninth time in 2020. According to Freddie Mac, the 30-year fixed mortgage rate dropped by 13 bps from the previous week to 86% for the week of September 10. The previous record low was seen in early August at 2.88%, which is far lower than the average rate seen 2019 of 3.56%.  Rates have declined due to the slowdown of the economic recovery and increased equity market risk.

III) The US Producer Price Index (PPI) in August rose by 0.3%, exceeding the Street estimate of 0.2%.  The rise came despite the drop in food prices (-0.4%) and energy (-0.1%).  The core reading increased by 0.4% after seeing a July rise of 0.5%. The jump in the core index over the past year remains tepid at 0.6%.

IV) The August Consumer Price Index (CPI) beat the Street estimate of 0.3% by rising 0.4%. The primary upside surprise in the report was the sharp increase of 5.4% for used vehicle prices.  This gain was the highest since 1969.  Gains in August were also seen in airfares (+1.2%), lodging (+0.9%) and apparel (+0.6%).  The belief though is COVID-19 will cap inflation, as the yearly change in core CPI is down from 2.3% in January to 1.7% in August.

V) Equities Month to Date are higher with Mid-Cap, Value, and Materials leading equity price performance. The laggards for the period are Large-Cap, Growth, Technology, and Information Technology.

Capitalization: Large Caps -4.79% (YTD +5.15%), Mid-Caps -3.37% (YTD -3.77%) and Small Caps -4.10% (YTD  -9.40%). Style: Value3.19% (YTD -19.24%) and Growth -4.26% (YTD -2.72%). Sector Groups: Technology -8.63% (YTD +24.13%), Information Technology  -8.61% (YTD +22.46%), Consumer Discretionary -2.75% (YTD +17.30%), Communication Services -5.20% (YTD +9.44%), Materials +3.23% (YTD +7.22%), Consumer Staples -1.41% (YTD +4.09%), Healthcare -3.43% (YTD +3.58%), Industrials -0.33% (YTD -3.58%),  REITs -1.86% (YTD -6.65%), Utilities -0.51% (YTD -7.15%), Financials -1.39% (YTD -18.44%) and Energy -8.50% (YTD -43.67%).

European Equities                                      

The MSCI Europe Index rose as M&A activity involving Altice Europe receiving a bid from its founder, Patrick Drahi, and Swiss frozen goods maker Arzta in takeover talks with Elliott Associates boosted stock prices.

Drivers: I) The ECB last week kept monetary policy unchanged as expected.  The central bank did change some verbiage, with a pledge to “carefully assess incoming information, including the developments in the exchange rate” and to adjust all instruments, if needed to ensure that inflation movers toward the target. There is a growing concern that the euro’s recent appreciation against the USD could hamper export and economic growth.

II) Industrial production in Germany rose by 1.2% m/m in July. The increase pushed the July production level to an estimated 45.0% annualized rate above the Q2 2020 average for industrial production, confirming a sharp rebound is expected Q3 2020. Recent estimates of weekly GDP show German growth had recovered 95.0% of its pre-COVID 19 level by the end of June, with industrial production bouncing back to 90.0% of normal.

III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +1.99% for the week (MTD -0.54% YTD -6.21%).

Asian Equities

Asian equity markets rose as Japan reduced COVID-19 restrictions in Tokyo and on hopes for a coronavirus vaccine.  The DJ Asia Index advanced by +0.81% for the week, (MTD -0.71% YTD -5.43%).

Drivers: I)  The Q2 2020 GDP growth rate in Japan was revised lower by 0.3 points to -28.1% q/q, which met Street expectations.  The decline in GDP was due primarily to a down shift in capex growth from -5.8% to -17.5%, while there was an upside revision for private consumption growth from -28.9% to -28.2%.  The negative revision to capex was expected as the Ministry of Finance’s corporate survey released last week showed weaker data.

II) The August trade data for China showed the growth in exports continued to recover from Q1, with merchandise exports rising by 9.5% on an annualized basis. The rise was 1.3% month over month, following the strong annualized rise seen in July of 7.2%. The increase in exports, has pushed China’s trade surplus with the US to $289.1 billion, a rise from $255.3 billion during the same period in 2019.

III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei rose by +0.87% (MTD +1.15% YTD +0.10%), the Hang Seng Index was higher by +0.78% (MTD -2.68% YTD -12.66%) and the Shanghai Composite declined by -2.83% (MTD -3.99% YTD +6.89%).

Fixed Income

Treasury yields fell due to the sell-off in technology shares and solid demand for the 30-year treasury auction which sold $23 billion in bonds, with a bid to cover ratio of 2.31 versus 2.14 for the previous auction.

Performance: I) The 10-year Treasury yield was lower last week ending at 0.670% down from 0.721%. The 30-year yield fell last week finishing at 1.416% dropping from 1.472%.

II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose +0.25% last week, MTD +0.17% and YTD +7.03%. The Bloomberg Barclays US MBS TR was flat at -0.01% last week, MTD -0.03% and YTD +3.69%. The Bloomberg Barclay’s US Corporate HY Index was lower by -0.22% for the week, MTD -0.32% and YTD +1.34%.

Commodities

The DJ Commodity Index was lower last week by -0.52% and is down month to date -2.46% (YTD -3.49%).  Commodity prices dropped on the week as natural gas plunged by 12.3% and oil by 5.98% on demand concerns.

Performance: I) The price of oil fell last week by -5.98% to close at $37.39 and is lower month to date by -12.25% (YTD -38.76%). Oil prices declined last week on rising inventory levels and waning demand worries.

II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was higher by +0.59% ending at 93.27 for the week (MTD +1.22% YTD -3.23%). The USD rose last week, as the dollar caught a safe haven bid with US equity markets experiencing a sell-off led by previously high-flying technology shares.

III) Gold was higher last week on continued COVID-19 worries, low interest rates and a weak USD.  Gold  was higher by +0.71% last week, rising to $1948.1 (MTD -1.54% YTD +27.90%).

Hedge Funds                 

Hedge fund returns in September are mixed with the core strategies Equity Hedge, Event Driven, Macro/CTA lower for the month, while Relative Value and Multi-Strategy are in positive territory.

Performance:

  1. The HFRX Global Hedge Fund Index is lower at -0.46% MTD and up +1.32% YTD.
  2. Equity Hedge has declined by -1.00% MTD and is lower by -3.94% YTD.
  3. Event Driven is down MTD -0.08% and is up YTD +4.11%.
  4. Macro/CTA has fallen by -1.01% MTD and is higher by +0.38%
  5. Relative Value Arbitrage is higher by +0.11% and is up +4.38% YTD.
  6. Multi-Strategy is up MTD by +0.15% and has risen by +4.00% YTD

Data Source: Haver Economics