Economic Data Watch and Market Outlook
Equity markets bounced back last week with the resiliency of Patrick Mahomes throwing a 60-yard touchdown to Tyreek Hill after taking a sack (yes, it is Super Bowl weekend). The S&P 500 after suffering its worst weekly decline since October at the end of January of -3.3%, rallied sharply last week by 4.67% and hit a new all-time high on Thursday. The negative sentiment caused by the increase in global COVID-19 cases, the spread of its variant, and the insipid short squeeze rise in “junk stocks” dissipated. The rally was brought on by a spate of positive news including improving economic data (ISM Manufacturing and Services), better than expected corporate earnings, and a power play in Washington, which should lead the way to passage of the $1.9 trillion coronavirus rescue package proposed by President Biden. House and Senate Democrats pushed through their respective Houses, a reconciliation process that would require a simple majority vote (versus a super majority requiring 60 votes) in the Senate (Vice President Harris casting the deciding vote) to pass the rescue package. The vote would approve the $1.9 trillion in additional fiscal stimulus, which includes an extension of federal unemployment benefits, a $1400 stimulus check, aid for state and local governments, and help to increase the distribution and vaccinations of the coronavirus vaccine. The additional stimulus should provide a boost to the consumer, and will lead to even higher estimates for economic growth in 2H 2021.
As we enter next week’s trading sessions, the focus of investors will be on Washington’s progress in approving the $1.9 trillion fiscal stimulus package proposed by President Biden. In the meanwhile, the corporate earnings season will continue, with media giants Disney and Twitter reporting, along with consumer companies including Coca-Cola, Pepsi Co., Kellogg, Kraft Heinz, and Tyson Foods. Investors will also be interested in reports from companies that have been decimated by the coronavirus lock-down, including MGM Resorts International, online booking company Expedia and retail REIT Simon Properties Group. Thus far with 59% of the S&P 500 having reported, 81% and 79% of companies have beaten their earnings and revenue estimates respectively. The blended earnings for Q4 2020 have grown by 1.7%, far exceeding the -9.3% projected at year end. The improved earnings and growth outlooks have offset the negative technicals that have overhung the markets. The positive market bias can continue, as long as corporate earnings continue to grow and help compress P/E ratios (S&P 500 P/E 22 versus five-year average of 17.6).
In turning to the coming week’s economic calendar, in a light week for data releases, the emphasis will be on inflation and consumer sentiment. On Wednesday, the January CPI is projected to jump by 0.5% led by a recovery in energy prices which is forecast to surge by 5.3% on the month. Core CPI ex-food and energy is estimated to have increased by 1.5% in January, equaling the rise seen in December. A key component to the inflation measure is rent, and the pandemic has moderated its rise, with January’s reading expected to come in at a 0.1% increase.
The University of Michigan consumer sentiment index out on Friday, is estimated to have improved by one point to 80 in February. The modest gain is believed to have been lifted by the vaccine distribution and recent reduction in new COVID-19 cases.
The Week In Review
U.S. Equities
US equity markets staged a strong rally last week as corporate earnings continued to exceed expectations, and on the increased probability President Biden’s $1.9 trillion stimulus plan will be passed.
US Index Performance
- Dow Jones +3.90% MTD +3.90% YTD +1.87%
- S&P 500 +4.67% MTD +4.67% YTD +3.61%
- Russell 2000 +7.72% MTD +7.72% YTD +13.14%
- NASDAQ +6.01% MTD +6.01% YTD +7.51
Drivers: I) January’s ISM Manufacturing survey slowed to 58.7 from December’s reading of 60.5. Though lower, the manufacturing survey is a solid report, as subindexes on orders and production pulled back from extraordinarily strong levels seen in December. The survey was led by increases in new orders (56.5 to 59.9), output (58.3 to 60.5) and employment (52.2 to 54.7).
II) The January ISM Services survey surprised to the upside, increasing from December’s reading of 57.7 to 58.7 in January. The sector has been weighed down by the coronavirus, but national surveys covering the service sector has begun to improve. The rise in the index was led by sharp increases from December to January seen in business expectations (65.4 to 73.5) and business activity (54.8 to 58.3).
III) December Construction spending rose by 1.0%, as construction spending has recovered from the drop seen early in the pandemic. Leading the way, has been spending on residential investment which jumped by 3.1% in December and soared by 52.0% in the fourth quarter on a seasonally adjusted annual rate. Conversely, non-residential construction trended lower by 1.7% for the month. Lodging construction has been very weak, declining by 25.0% on an annual basis in December.
IV) The Nonfarm payroll report for January undershot the expected 200,000 jobs created, by posting job gains of only 46,000. Underneath the headline report, the data was a bit better. The important average private work week increased by 0.3 hours to 35 hours for the month, which was a new high since the series started in 2006. Average hourly earnings rose by 0.2%, and with the gain in hours worked, total labor income jumped by 1.1%. This rise should help to support consumer spending in the coming months, even without new stimulus checks.
V) Equities Month to Date are higher with Small-Cap, Growth, Energy, and Communication Services leading equity price performance. The laggards for the period are Large-Cap, Value, Healthcare and Utilities.
Capitalization: Large Caps +4.92% (YTD +4.06%), Mid-Caps +5.58% (YTD +5.30%) and Small Caps +7.72% (YTD +13.14%). Style: Value +5.56% (YTD +8.39%) and Growth +5.90% (YTD +9.26%). Sector Groups: Energy +8.19% (YTD +12.27%), Communication Services +7.62% (YTD +7.38%), Consumer Discretionary +6.23% (YTD +7.05%), Financials +6.61% (YTD +4.81%), Information Technology +5.03% (YTD +4.25%), Technology +4.95% (YTD +3.97%), REITs +3.16% (YTD +3.70%), Healthcare +0.50% (YTD +1.92%), Materials +4.03% (YTD +1.57%), Utilities +2.30% (YTD +1.36%), Industrials +4.89% (YTD +0.38%), and Consumer Staples +2.53% (YTD -2.58%)
European Equities
The MSCI Europe Index climbed higher last week as the number of new COVID-19 cases have abated, and on improving earnings and revenue forecasts from European corporations during the Q4 reporting season.
Drivers: I) Euro-zone Q4 2020 GDP declined by 2.8% quarter over quarter, as the coronavirus lock-down restrictions imposed in November took a toll on economic activity. The report was far better than the GDP contraction seen in Q1 2020, due to better hygiene and medical protocols in place. The declines in GDP were affected by the level of restrictive measures imposed by individual countries beginning in November. Tighter restrictions in France and Italy led to drops in GDP of 5.3% and 7.7% on an annualized basis in Q4.
II) Inflation in the Euro-zone in January rose by 1.3% month over month, sending the annual rate of inflation to 0.9%. The increase in inflation was led by a jump in energy price inflation of 2.8% and food inflation of 0.2%. However, the primary driver of inflation was the increase in Germany’s VAT from 16% to 19%, which had been temporarily reduced in July 2020 due to the COVID-19 induced recession.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +2.37% for the week (MTD +2.37% YTD +0.88%).
Asian Equities
Asian markets were higher last week on improvements in corporate earnings and revenues, and expectations that new fiscal stimulus in the US will raise global growth. The DJ Asia Index was higher by +5.24% for the week, (MTD +5.24% YTD +6.89%).
Drivers: I) In Japan, the acute rise in coronavirus infections since late November caused the BOJ’s December Activity Index to decline by 0.6% month over month, sending the index 4.2% below the pre-pandemic level. The greatest drag was from services consumption, which dropped by 2.6%. With mobility having fallen since Japan invoked a state of emergency on January 8, a sizable drop in consumption is expected in January.
II) In China, the PMIs for January came in below expectations. The Caixin/Market manufacturing PMI declined by 1.5 points to 51.5, with sharp declines seen across the major sub-components including output, new orders, and export orders. In addition, the NBS non-manufacturing PMI fell by 3.3 points to 52.4 as the latest surge in new COVID-19 cases has been a drag on service sector activity.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei rose by +4.03% (MTD +4.03% YTD +4.87%), the Hang Seng Index was higher by +3.55% (MTD +3.55% YTD +7.56%) and the Shanghai Composite was advanced by +0.38% (MTD +0.38% YTD +0.67%).
Fixed Income
Treasury yields rose to their highest level since March, as disappointing non-farm payroll data increased the possibility of additional stimulus which could lead to faster economic growth and higher inflation.
Performance: I) The 10-year Treasury yield rose last week ending at 1.168% up from 1.063%. The 30-year yield advanced last week finishing at 1.974% rising from 1.832%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index fell by -0.39% last week, MTD -0.39% and YTD -1.11%. The Bloomberg Barclays US MBS TR was lower by -0.01% last week, MTD 0.01% and YTD +0.07%. The Bloomberg Barclay’s US Corporate HY Index rallied higher by +0.70% for the week, MTD +0.70% and YTD +1.04%.
Commodities
The DJ Commodity Index rallied last week by +3.09% and is up month to date +3.09% (YTD +6.83%). Commodity prices jumped last week as expectations of further fiscal and monetary stimulus, led to projections of accelerating economic growth and demand for energy and industrial metals.
Performance: I) The price of oil rose last week by +9.45% to close at $57.07 and is higher month to date by +9.45% (YTD +17.62%). Oil soared in price as OPEC and its allies vowed to keep a lid on production, while further stimulus in the US, Euro-zone and Asia should re-ignite the global economy and 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 +0.52% ending at 91.00 for the week (MTD +0.52% YTD +1.19%). The USD rose on the week, as expectations for another US stimulus package and eventual reflation of the economy sent the dollar higher.
III) Gold was lower last week as a weaker than expected jobs report led to calls for further US stimulus, prompting a rise in interest rates and USD which are both negative for the precious metal. Gold fell in price by -1.87% last week, declining to $1815.2 (MTD -1.87% YTD -4.21%).
Hedge Funds
Hedge fund returns in February are positive for the month with all of the core strategies Equity Hedge, Event Driven, Macro/CTA, Relative Value and Multi-Strategy higher.
Performance:
I) The HFRX Global Hedge Fund Index is higher at +1.26% MTD (+1.09% YTD).
II) Equity Hedge advanced by +2.17% MTD (+1.11% YTD).
III) Event Driven is up MTD +1.42% (+2.05% YTD).
IV) Macro/CTA has risen by +0.85% MTD (+0.27% YTD).
V) Relative Value Arbitrage is higher by +0.37% (+0.69% YTD).
VI) Multi-Strategy is up MTD by +0.29% (+0.54% YTD).
Data Source: Haver Economics, Standard & Poor’s, 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.