Economic Data Watch and Market Outlook
The S&P 500 and NASDAQ Composite declined for a third straight week, with weakness seen particularly in the technology, consumer discretionary and communication service sectors. All eleven S&P 500 sectors were lower on the week as spikes in new COVID-19 cases in Europe and quadruple witching fueled the market’s downside pressure. However, the main culprit behind the equity market drop were comments or lack of comments from the Fed. After announcing a shift in Fed policy at Jackson Hole, investors sought specific details regarding the policy pivot. Instead, the Fed reiterated it would keep rates near zero bound range until at least 2023, would remain accommodative, and maintain a 2.0% inflation target to support the labor market. However, the market’s fixated on Chairperson Jerome Powell’s statements that the Fed saw a “highly uncertain” economic outlook and “only elected officials have the power to tax and spend” and provide fiscal stimulus. The assumed “Fed Put” has decayed a bit, and fiscal stimulus from Congress and the White House is needed to replace the lost income of the unemployed, in order to keep the economy and financial markets on an uptrend.
As we enter next week’s trading sessions, we will see if the recent rotation from growth to value (we have seen this playbook before), will continue. Despite concerns of a slowdown in the rate of US economic growth, the Dow Jones Transportation Index which is composed of economically sensitive stocks in the airline, railroad and trucking sectors, hit a record high last week for the first time in two years. Blowout revenues and earnings from FedEx due to the surge in eCommerce deliveries was a major tailwind. Is this a true shift in investor sentiment, or was this market decline prompted by another factor ? Recent market activity has seen sharp increases in option and stock trading volumes. I have written about the growing influence of the retail investors in equity and option trading, and they may have been responsible for part of the 30.0% increase in daily trading volume on quadruple witching Friday. The surge in stock trading may have been caused by the unwinding of retail investor owned option positions. The CBOE reported that September daily trading volume has increased to 34.2 million contracts versus only 20.3 million seen during September 2019. It will be interesting to see if the growth to value trend reverses again as options and futures expiration are behind us, and will investors pivot back to quality tech and growth names.
In turning to the coming week’s economic calendar, in light week for data releases, the headlines will be dominated by the housing sector. On Tuesday, with kick off with August Existing Home Sales which is projected to have increased by 4.1% to 6.1 million units on a seasonally adjusted annual rate. The strong housing market prompted by historically low mortgage rates continues to provide a boost to the US economy.
On Thursday, the New Homes Sales report for August is estimated to have increased by 1.0% to 910,000 saar. Home sales have risen after being depressed by the coronavirus lock-down, and have posted some of the strongest monthly readings in several years.
Closing out the week on Friday, the report for Durable Goods new orders is estimated to have jumped by 2.4% in August. Leading the rise in orders is core capital goods orders (+0.9%) and core capital goods shipments (+0.6%).
The Week In Review
U.S. Equities
US equity markets fell for a three consecutive week as fiscal stimulus talks remain in neutral and the Fed stated the US economic recovery from the COVID-19 pandemic could be a long one.
- Dow Jones -0.01% MTD -2.61% YTD -1.35%
- S&P 500 -0.60% MTD -5.08% YTD +4.17%
- Russell 2000 +2.68% MTD -1.53% YTD -6.98%
Drivers: I) The Federal Reserve revealed for the first time, its 2020 “dot plot” which showed that Committee members expect no interest rate hikes through the end of 2023. The FOMC’s outlook is for inflation to rise back up to its 2.0% target while unemployment should be close to its near natural rate of an estimated 4.1%. However Fed officials did warn that the recovery in employment could take up to three years before the UE rate falls back to pre-COVID 19 levels.
II) US Retail Sales for August rose by 0.6% which was below the Street consensus expectation of 0.9%. The increase in August was the slowest since retail sales began its recovery in May. It is suspected the slowdown in sales growth has been exacerbated by the expiration of excess jobless benefits at the end of July. Even with the recent slowdown, the Street is estimating consumer spending for Q3 will rise at a 38.0% annual rate.
III) In August, Industrial Production rose by 0.4% while manufacturing output was higher by 1.0%. Though improving, the August results are still a good deal below the pre-coronavirus levels, as total production sank by an estimated 7.0% between February and August. Outside of the manufacturing sectors in the Industrial Production report, mining output declined by 2.5% due to storm activity, and utility output was lower by 0.4%.
IV) The University of Michigan Consumer Sentiment Index in August rose strongly to 78.9, up from the July reading of 74.1. The report exceeded the expected showing of 75.9, but still resides below the levels seen before COVID-19’s surge. Within the report, inflation expectations continue to wane, as it dropped from 3.1% to 2.7% with the median five year forward expectation declining from 2.7% to 2.6%.
V) Equities Month to Date are lower with Small-Cap, Value, Industrials and Materials leading equity price performance. The laggards for the period are Large-Cap, Growth, Technology, and Information Technology.
Capitalization: Large Caps -4.96% (YTD +4.95%), Mid-Caps -2.31% (YTD -2.71%) and Small Caps -1.53% (YTD -6.98%). Style: Value –2.51% (YTD -18.67%) and Growth -3.51% (YTD -1.95%). Sector Groups: Technology -9.58% (YTD +22.84%), Information Technology -9.46% (YTD +21.32%), Consumer Discretionary -4.13% (YTD +15.62%), Materials +4.28% (YTD +8.30%), Communication Services -6.51% (YTD +7.93%), Healthcare -2.56% (YTD +4.52%), Consumer Staples -2.93% (YTD +2.49%), Industrials +1.18% (YTD -2.11%), REITs -1.76% (YTD -6.55%), Utilities -1.25% (YTD -7.84%), Financials -1.56% (YTD -18.58%) and Energy -5.78% (YTD -41.99%).
European Equities
The MSCI Europe Index was higher last week as the euro continued to strengthen against the USD and there were rumors the ECB may lift the dividend ban for European banks.
Drivers: I) Industrial Production in the euro-zone for July rose by 4.1% m/m, which follows the strong gains seen in May and June of 12.2% and 9.5% respectively. The welcomed rebound only partially offset the decline in industrial production of -27.0% seen in March and April during the height of the coronavirus lock-down. Strong fiscal stimulus has brought industrial production back to within 7.2% of its pre-coronavirus levels.
II) The euro-zone inflation rate in August dropped by -0.4% m/m, which comes on the back of the July decline of 0.6 point in the annual rate to -0.2%. The economic slowdown in the euro-zone caused by the COVID-19 pandemic has pulled core inflation lower. Excluding the clothing category, the decline in core goods price inflation has dropped by 0.9% from levels seen in January and February. The drop was driven primarily by the fall in airline, travel package and hotel/accommodation costs.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +0.40% for the week (MTD -0.14% YTD -5.84%).
Asian Equities
Asian equity markets were primarily higher last week, as equity prices were supported by comments from Japan’s new Prime Minister Suga that his administration would promote economic growth and China’s solid economic data. The DJ Asia Index advanced by +1.27% for the week, (MTD +0.54% YTD -4.22%).
Drivers: I) Japan’s new Prime Minister, Yoshihide Suga took office last week, and emphasized his new administration would pursue a policy to promote economic growth while working to contain COVID-19. The prime minister also appointed his Cabinet, members who were primarily reappointments or had appointments in the Abe administration, while welcoming five new members. Prime Minister Suga also acknowledged the need to hold a lower house election by September 2021, and a possibility an earlier snap election could occur.
II) Data out of China for August showed the economic recovery has remained strong through Q3, as demand has increased across the economy. Industrial Production rose by 0.8% m/m in August, which is a 5.6% annual rate. The rise in industrial production was led by machinery equipment production and technology related activity, auto production, infrastructure and construction related sectors. Retail sales in August also rose by a healthy 2.3% m/m and unit auto sales surged by 11.7% on an annualized basis.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei fell by -0.20% (MTD +0.95% YTD -0.09%), the Hang Seng Index was lower by -0.19% (MTD -2.87% YTD -12.83%) and the Shanghai Composite advanced by +2.38% (MTD -1.70% YTD +9.44%).
Fixed Income
Treasury yields were higher last week as a strong rise in the University of Michigan consumer sentiment index helped ease concerns regarding the US economic recovery.
Performance: I) The 10-year Treasury yield was higher last week ending at 0.701% up from 0.670%. The 30-year yield rose last week finishing at 1.454% climbing from 1.416%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index fell -0.09% last week, MTD +0.07% and YTD +6.93%. The Bloomberg Barclays US MBS TR was lower at -0.19% last week, MTD -0.23% and YTD +3.49%. The Bloomberg Barclay’s US Corporate HY Index was higher by +0.10% for the week, MTD -0.22% and YTD +1.44%.
Commodities
The DJ Commodity Index was higher last week by +3.60% and is up month to date +1.19% (YTD +0.07%). Commodities rose last week as industrial metals and agriculture have seen a rise in demand, while oil climbed higher due to the decline in energy supplies.
Performance: I) The price of oil rose last week by +9.57% to close at $40.97 and is lower month to date by -3.84% (YTD -32.90%). Oil prices saw their best weekly gain since June after major oil producers pledged their full commitment to output cuts.
II) The ICE USD Index, a gauge of the U.S dollar’s movement against six other major currencies, was lower by -0.29% ending at 93.00 for the week (MTD +0.93% YTD -3.51%). The USD was lower last week as the Fed reconfirmed short term rates would remain close to 0.0% for several years, and due to concerns US growth would slow without passage of CARES 2.
III) Gold was higher last week as the Federal Reserve confirmed interest rates would stay lower for longer. Gold was higher by +0.46% last week, rising to $1957.1 (MTD -1.09% YTD +28.49%).
Hedge Funds
Hedge fund returns in September are mixed with the core strategies Event Driven, Relative Value and Multi-Strategy higher for the month, while Equity Hedge and Macro/CTA are in negative territory.
Performance:
- The HFRX Global Hedge Fund Index is higher at +0.03% MTD and up +1.83% YTD.
- Equity Hedge has declined by -0.52% MTD and is lower by -3.47% YTD.
- Event Driven is up MTD +0.89% and is up YTD +5.12%.
- Macro/CTA has fallen by -0.63% MTD and is higher by +0.77%
- Relative Value Arbitrage is higher by +0.24% and is up +4.52% YTD.
- Multi-Strategy is up MTD by +0.28% and has risen by +4.13% YTD
Data Source: Haver Economics