Weekly Market Commentary – November 16, 2020

Economic Data Watch and Market Outlook

Equity market price action last week reminded me of the saying, “beauty is in the eye of the beholder”.  At the surface, equity markets rallied strongly last week on the news that Pfizer’s COVID-19 vaccine had a 90% efficacy rate, several media outlets called the presidential election for Joe Biden, Republican’s should retain a majority in the Senate (pending the January 5^th run-offs in Georgia) and had narrowed the Democratic majority in the house (presently 219 to 203 with 13 races awaiting a winner) which was 232 to 197 pre-election.  This helped equity indexes to post their best weekly gains since April, and propelled the Dow Jones Industrial Average and S&P 500 to new all-time highs.  But beneath the beauty of the rally in the equity indexes, there was price carnage across sectors, styles, and active management.  All of the positive positioning since Q1 favoring large caps, quality, technology, momentum, and growth all violently reversed for a few days.  Hopes for an effective COVID-19 vaccine pushed up the previous laggards including value, and sectors such as energy, financials, travel, and leisure.  Bloomberg reported that the DJIA outperformed the heavy tech NASDAQ on Monday and Tuesday by a cumulative 6.7%, the largest performance disparity since the tech bubble in 2001.  The violent market rotation caused active equity managers to lose a portion of the alpha they had generated this year, but by week’s end the rotation seems to have ceased, as investors turned their focus back to current fundamentals.

As we enter next week’s trading sessions, investors should continue to see a choppy market that will ebb and flow on several unresolved issues.  There has been a sharp increase in new COVID-19 cases in the US, prompting new restrictive measures such as the closing of bars, indoor dining, and schools.  With daily cases rising above 150,000 (twice the average from two weeks before), will either a Pfizer or Moderna vaccine arrive fast enough to help stem the second wave of the coronavirus.  Investors are also weighing the possibility of a new stimulus package in the US, how much and more importantly when?  Fortunately, in the background a positive corporate earnings season has supported stocks. With 90% of companies having reported, the earnings decline of -7.1% far exceeds the end of Q3 projection of -21.2% according to FactSet.  Investors and markets hope this recovery in earnings and the recent rebound in economic data is not de-railed by another COVID-19 lock-down.  The actual delivery of an effective vaccine or treatment, and another round of stimulus would surely help.

In turning to the coming week’s economic calendar, we will be inundated with housing data, which is important as the sector has been a prominent tailwind for the US economic rebound.  We will also get a glimpse of how the consumer is faring as US Retail Sales for October will be released on Tuesday.  The forecast for US Retail Sales calls for an improvement of 0.4%, while sales ex energy and food are projected to rise by 0.7%.  The rise in retail sales is expected to be supported by the jump in food service sales of 1.0% for the month.

On Wednesday, the Housing Starts report is estimated to have risen by 2.5% to 1.450 million units in October, while permits rose by 1.0% to 1.560 million units.  The starts data is being helped by the rebounded in multifamily starts, which is expected to jump by 14.0% in October, after falling back in August and September.

October’s Existing Home Sales out on Thursday is projected to have dropped by 0.6% to 6.50 million units.  After surging for several months, sales have slacked off due to the decline in available inventory.

The Week In Review

U.S. Equities

US equity markets staged their strongest one week rally since April, sending the S&P 500 to a new all time high, as progress towards an effective vaccine offset the negative of a sharp rise in new COVID-19 cases.

1. Dow Jones +4.19% MTD +11.36%  YTD +5.37%
2. S&P 500 +2.21%  MTD +9.74%  YTD +12.77%
3. Russell 2000 +6.13% MTD +13.44%  YTD +5.76%

Drivers: I) Pfizer and BioNTech reported there COVID-19 vaccine had an efficacy rate of 90%, which far exceeded the medical community’s expectations.  The two companies which began to develop a vaccine together in March, stated in a news release that “an interim analysis from the Phase Three clinical trial indicates BNT162b2, the investigational mRNA vaccine, has an efficacy rate higher than 90%”. The study called for an efficacy rate of 60%.

II) The October report for the Consumer Price Index (CPI) came in below expectations, rising by only 01%. The core index was also soft, reporting only a 1.6% annualized rise for October.  Food prices rose by 0.2%, and there was a modest rise in energy of 0.1%.  Due to the pandemic, lodging prices fell by -3.2% and apparel prices dropped by -1.2% as clothing sales such as business wear have dropped due to working from home.

III) The Produce Price Index (PPI) for October was higher by 0.3% which the core index ex-food and energy was up a marginal 0.1%.  The report saw an unexpected increase in food prices of 2.4%, while the prices for autos fell by -0.8% and light truck dropped by -1.1%.  Prices for construction came in below expectations, as the category was unchanged which was counter to the recent trend of seeing a rise at the beginning of the past few quarters.

IV) The November reading of the University of Michigan consumer sentiment index fell to 77.0 from October’s reading of 77.0. The drop in sentiment has been prompted by the resurgence of new COVID-19 cases and due to the decline in expectations for a Republican White House victory.  The weakening of sentiment can also be attributable to the recent declines in high frequency data showing consumer activity has slowed due to the increased spread of the coronavirus.

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

Capitalization: Large Caps +9.68% (YTD +13.88%), Mid-Caps +10.36% (YTD +8.46%) and Small Caps +13.44% (YTD +5.76%). Style: Value +13.21% (YTD -6.76%) and Growth +10.89% (YTD +10.85%). Sector Groups: Technology +9.35% (YTD +33.40%), Information Technology  +9.46% (YTD +32.29%), Consumer Discretionary +7.29% (YTD +23.44%), Communication Services +9.63% (YTD +20.50%), Materials +9.23% (YTD +14.21%), Healthcare +10.29% (YTD +11.50%), Consumer Staples +8.54% (YTD +9.36%), Industrials +13.00% (YTD +6.92%), Utilities +5.97% (YTD +5.02%), REITs +9.94% (YTD -0.93%), Financials +13.23% (YTD -10.34%) and Energy +18.15% (YTD -40.50%).

European Equities

The MSCI Europe Index rallied strongly last week as news of a Pfizer COVID-19 vaccine having a 90% efficacy rate offset the negatives of a sharp rise in new coronavirus cases in the US and Euro-zone.

Drivers: I) At last week’s ECB virtual Forum on Central Bank, ECB president Christine Lagarde paved the way for new policy action at the central bank’s December meeting.  Lagarde’s emphasized the necessity of maintaining loose financial conditions, and will use the PEPP and TLTRO-IIIs programs to support the most affected sectors.  PEPP purchases private and public securities to ensure market liquidity, while TLTRO-IIIs provides low cost financing to small and medium sized enterprises most adversely affected by the COVID-19 pandemic.

II) In September, Industrial Production in the Euro-zone dropped by 0.4% month over month, which reversed the positively monthly gains seen since May. However, a silver lining in the report shows the downturn was caused by sizable declines in Italy (-5.6% m/m) and Ireland (-4.7% m/m), both of which has experienced very sharp production gains during the summer. Excluding these two countries, industrial production actually grew by 1.0%.

III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +4.88% for the week (MTD +14.31% YTD -1.68%).

Asian Equities

Asian equity markets were mostly higher last week, lifted by prospects a COVID-19 vaccine could bring some normalcy back to the global economy.

The Shanghai Index was lower as investors were concerned over the possible enforcement of a 2008 anti-monopoly law on internet companies such as Alibaba and Tencent.  The DJ Asia Index advanced by +1.68% for the week, (MTD +8.64% YTD +1.87%).

Drivers: I)  In China, a group of new regulators appeared to bring the large technology companies under the microscope.  In short, the government officials proposed regulations on Monday for public comment, on how China’s 2008 anti-monopoly law could be applied to internet companies.   The announcement provided no indication  of any wrongdoing, but intimated there could be grounds where regulators were concerned over the sharing of information and where services are priced below cost to fend off smaller competitors.

II) In Japan, Prime Minister Suga requested the Japanese Cabinet to design and propose a third supplementary budget to further aid the economy. The plan is expected to include a continuation of subsidies for consumption and employment, a provide for new public investment. The amount of the new budget is still undetermined, but members of the Liberal Democratic Party for asking for JPY 30 trillion, which is about 6% of Japan’s GDP.

III) Performance of Asian Indexes for the week, month-to-date and year-to-date.  The Nikkei rose by +4.37% (MTD +10.49% YTD +9.25%), the Hang Seng Index was higher by +1.72% (MTD +8.49% YTD -6.81%) and the Shanghai Composite declined by -0.06% (MTD +2.65% YTD +8.52%).

Fixed Income

Treasury yields rose last week as the prospects of an effective COVID-19 vaccines prompted a risk-on rally in equities, while sending treasury prices lower.

Performance: I) The 10-year Treasury yield was higher last week ending at 0.894% up from 0.815%. The 30-year yield rose last week finishing at 1.648% climbing from 1.606%.

II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index fell -0.14% last week, MTD +0.35% and YTD +6.68%. The Bloomberg Barclays US MBS TR was lower at -0.00% last week, MTD -0.01% and YTD +3.57%. The Bloomberg Barclay’s US Corporate HY Index rallied higher by +0.48% for the week, MTD +2.60% and YTD +3.76%.

Commodities

The DJ Commodity Index advanced last week by +3.25% and is up month to date +5.45% (YTD +3.41%). The sharp rise in energy and industrial metals drove the commodity index higher, as investors hoped an effective COVID-19 vaccine would accelerate economic growth and the demand for commodities.

Performance: I) The price of oil soared last week by +7.01% to close at $40.12 and is higher month to date by +12.31% (YTD -34.29%). Oil prices were sharply higher as the prospect of an effective coronavirus vaccine could revive the travel industry and its demand for petroleum products.

II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was higher by +0.52% ending at 92.72 for the week (MTD -1.23% YTD -3.80%). The USD  rose last week as the rise in new US and European COVID-19 cases supported the dollar.

III) Gold dropped lower last week, as news of an effective COVID-19 virus from Pfizer drove investors from safe haven to risk assets.  Gold fell in price by -3.24% last week, declining to $1888.2 (MTD +0.50% YTD +23.97%).

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:

1. The HFRX Global Hedge Fund Index is higher at +1.65% MTD (+3.08% YTD).
2. Equity Hedge has advanced by +2.82% MTD (-0.75% YTD).
3. Event Driven is up MTD +1.65% (YTD +6.07%).
4. Macro/CTA has risen by +0.12% MTD (-0.29% YTD).
5. Relative Value Arbitrage is higher by +1.39% (+5.99% YTD).
6. Multi-Strategy is up MTD by +1.29% (+5.48% YTD).

Data Source: Haver Economics, HFR, Bloomberg, Morningstar and FactSet