Economic Data Watch and Market Outlook
In a week where global equity markets were inundated with President’s Biden’s avalanche of executive orders (42 and counting), corporate earnings reports, economic data and stimulus negotiations in the US, asset prices were most affected by news related to COVID-19 and long forgotten video game retailer GameStop. The S&P 500 and NASDAQ Composite posted record highs last Tuesday, on the back Treasury Secretary Janet Yellen’s call for Congress to “act big” in providing another round of stimulus to support the economic recovery. The markets abruptly reversed course mid-week on the news that retail novice investors joined forces via investment message boards such as Reddit’s WallStreetBets, to buy heavily shorted stocks which caused massive short squeeze rallies. Stocks such as Blackberry, AMC Theaters posted sizable gains, but the main culprit in this crazed buying spree was GameStop, which is up approximately 1600% year to date. The sharp rise in these crowded shorts forced hedge funds that were short a number of these stocks, to cover (exacerbating the upside price move) and de-risk/deleverage their portfolios. According to Goldman Sachs Prime Brokerage, the deleveraging was a 12.8 standard deviation event. The hedge fund selling caused the VIX to spike (35 as of Friday) and prompted systematic and volatility sensitive strategies to de-risk as well.
As we enter next week’s trading sessions, I had written over the past several weeks about the negative market technicals were flashing warning signs that a correction could occur in the coming weeks. Now the correction is upon us, and indicators I follow such as put/call (p/c) ratios, equity volume p/c ratios and p/c open interest are still bearish. It would not be surprising to see equity markets down 5.0% to 8.0% before bottoming. COVID-19 remains a concern and new variants, which originated in South Africa have found their way to parts of the US, UK, and Spain. The hope is the current vaccines from Pfizer/BioNTech and Moderna will be effective in combating the dreaded new virus. Finally, corporate earnings have been flying under the radar, but with 40% of S&P 500 companies having reported, 82% and 74% have beaten earnings and revenue projections respectively. Overall, earnings on a blended basis are at +3.1% versus the start of quarter projection of -8.4%. The better-than-expected earnings and the outlook for improving economic growth and corporate earnings, should help turn the equity markets around after the current downturn runs it course.
In turning to the coming week’s economic calendar, the data releases will be dominated by the ISM Manufacturing and Services surveys as well as January’s Non-farm payroll reading. The ISM Manufacturing survey on Monday is expected to show activity remained unchanged at 60.5 for January.
On Wednesday, the January survey for ISM Services is estimated to have declined by 0.7 points to 57.0. The survey had been improving in recent months due to increases in the supplier deliveries index. Currently, the spike in new COVID-19 cases has slowed the rebound in the services sector.
Closing out the week on Friday is the Non-Farm payroll report for January, which is projected to show and increase of 200,000 jobs following the decline of 140,000 in December. The majority of December’s job losses were in the leisure and hospitality sector. The growth in jobs is expected to be driven by the private sector.
The Week In Review
U.S. Equities
US equity markets were sharply lower on the week, as the unprecedented price rise in crowded short positions and disappointing roll out of the COVID-19 vaccine caused investors to de-risk.
US Index Performance
- Dow Jones -3.27% MTD -1.95% YTD -1.95%
- S&P 500 -3.29% MTD -1.01% YTD -1.01%
- Russell 2000 -4.38% MTD +5.03% YTD +5.03%
- NASDAQ -3.49% MTD +1.42% YTD +1.42
Drivers: I) The Q4 GDP rose by 4.0% on an annual basis, slightly below the Street estimate of 4.2%. On a year over year basis GDP contracted in 2020 by -3.5%, the worse decline since 1946. Consumer spending which had momentum in early Q4 slowed due to the increase in new COVID-19 cases, rising at a 2.5% annual rate. Fixed Investment by businesses was up a strong 18.4% rate, boosted by a 24.9% annual rise in equipment spending.
II) The January report for the Conference Board consumer confidence index rose from 87.1 to 89.3. The recent rise still leaves the index at the lower end of the range reported since the pandemic began. Though overall sentiment improved, the survey’s labor market sentiment worsened from -1.9 to -3.2. The current outlook also pulled back, declining from 87.2 to 84.4. Much of the change in sentiment is linked to the vaccine distribution.
III) December Consumer Spending slowed with real consumption declining 0.6%. December’s drop shows consumers activity was curtailed by the surge in new coronavirus cases. Spending on food services and accommodations took the brunt of the decline, while the drop off in other types of spending were moderate. Expectations for 2021 spending call for an improvement, due to fiscal support and vaccine distribution.
IV) The PCE price indexes surprised to the upside, but the overall trend remains behind the Fed’s inflation target of 0%. December’s PCE price index increased by 0.4% or 1.3% on an annual basis. The Core PCE deflator rose by 0.3% or 1.5% annually. Income jumped by 0.6%, supported by increases in wages and salaries as well as the rise in unemployment insurance payments.
V) Equities Month to Date are lower with Small-Cap, Growth, Energy, and Healthcare leading equity price performance. The laggards for the period are Large-Cap, Value, Industrials and Consumer Staples.
Capitalization: Large Caps -0.82% (YTD -0.82%), Mid-Caps -0.26% (YTD -0.26%) and Small Caps +5.03% (YTD +5.03%). Style: Value +2.69% (YTD +2.69%) and Growth +3.17% (YTD +3.17%). Sector Groups: Energy +3.77% (YTD +3.77%), Healthcare +1.41% (YTD +1.41%), Consumer Discretionary +0.78% (YTD +0.78%), REITs +0.52% (YTD +0.52%), Communication Services -0.22% (YTD -0.22%), Information Technology -0.75% (YTD -0.75%), Utilities -0.92% (YTD -0.92%), Technology -0.93% (YTD -0.93%), Financials -1.69% (YTD -1.69%), Materials -2.36% (YTD -2.36%), Industrials -4.30% (YTD -4.30%), and Consumer Staples -4.98% (YTD -4.98%)
European Equities
The MSCI Europe Index fell as some European shorts were caught up in the short squeeze phenomenon, and several countries were confronted with COVID-19 vaccine shortages and the spread of a new variant strain.
Drivers: I) Consumer sentiment in the Euro-zone suffered a significant decline of -1.7 points to -15.5. The consumer pulled back due to rising concerns over general economic conditions and their personal finances. These concerns have led to a trend in Europe as well as globally, where consumers are increasing their savings and spending less during the pandemic.
II) CPI inflation data out of Germany showed a 3% rise in January, due to beginning of the year VAT increase of three points. The overall increase in CPI was broad based, as energy inflation rose by 3.7%, which highlighted the increase in Brent crude and a carbon emission tax. Inflation tied to services increased by 0.4% to 1.5%, and food prices also increased, climbing by 1.7% to 2.2% on an annual basis.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was lower by -3.38% for the week (MTD -1.45% YTD -1.45%).
Asian Equities
Asian equities fell as US market volatility and downside pressure spread to Asia, and the continued spread of the coronavirus has led to new travel restrictions. The DJ Asia Index was lower by -4.51% for the week, (MTD +1.57% YTD +1.57%).
Drivers: I) In Japan, the COVID-19 state of emergency that has been in place for two weeks, has not induced a significant decline in the number of overall and new infections. The persistent spread of the virus may force Prime Minister Suga to extend the emergency measures beyond the scheduled February 7 end dates. The government plans on reviewing the efficacy of existing restrictions, as medical professional and some government official believe an extension of the restrictions is a fait accompli.
II) In China, industrial profits in December rose by a solid 20.1% on an annual basis, which is up from November’s reading of 15.5% growth. Despite the pandemic, industrial profits jumped by 4.1% in 2020, which is an improvement from the January to November report of a 2.4% rise. Key components to the profit rise were sales revenue growth of 0.8%, and the sharp increase in industrial profit margins which posited 6.08% growth.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei fell by -3.38% (MTD +0.80% YTD +0.80%), the Hang Seng Index was lower by -3.97% (MTD +3.85% YTD +3.85%) and the Shanghai Composite was declined by -3.43% (MTD +0.29% YTD +0.29%).
Fixed Income
Treasury yields fell last week as the move to increase COVID-19 vaccine distribution around the globe should hopefully revive the slowing global economic recovery, and due high equity market volatility.
Performance: I) The 10-year Treasury yield fell last week ending at 1.063% down from 1.086%. The 30-year yield declined last week finishing at 1.832% dropping from 1.849%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose by +0.03% last week, MTD -0.72% and YTD -0.72%. The Bloomberg Barclays US MBS TR was higher at +0.06% last week, MTD +0.08% and YTD +0.08%. The Bloomberg Barclay’s US Corporate HY Index rallied lower by -0.15% for the week, MTD +0.33% and YTD +0.33%.
Commodities
The DJ Commodity Index rallied last week by +1.09% and is up month to date +3.63% (YTD +3.63%). Commodities prices rose last week, as China stepped up demand for US agricultural products such as corn due to a sharp rise in Chinese demand for animal feed.
Performance: I) The price of oil rose last week by +0.31% to close at $52.14 and is higher month to date by +7.13% (YTD +7.13%). Oil has rallied over 7.00% for the year, as the increase in the distribution of the coronavirus vaccines should improve consumer mobility, travel, and the demand for energy.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was higher by +0.35% ending at 90.53 for the week (MTD +0.67% YTD +0.67%). The USD rallied last week on strong housing data and due to the volatility seen in global equity markets.
III) Gold was lower last week and for the month of January, due to the combination of a rising USD and interest rates. Gold fell in price by -0.31% last week, declining to $1849.8 (MTD -2.39% YTD -2.39%).
Hedge Funds
Hedge fund returns in January are mixed with the core strategies Event Driven, Relative Value and Multi-Strategy positive for the month, while Equity Hedge and Macro/CTA are lower.
Performance:
- The HFRX Global Hedge Fund Index is lower at -0.09% MTD (-0.09% YTD).
- Equity Hedge has declined by -1.09% MTD (-1.09% YTD).
- Event Driven is up MTD +0.67% (YTD +0.67%).
- Macro/CTA has declined by -0.27% MTD (-0.27% YTD).
- Relative Value Arbitrage is higher by +0.40% (+0.40% YTD).
- Multi-Strategy is up MTD by +0.29% (+0.29% YTD).
Data Source: Haver Economics, Standard & Poor’s, HFR, Bloomberg, Morningstar and FactSet
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