WEEKLY INSIGHT | AUGUST 5, 2020
Preliminary U.S. GDP numbers for the second quarter were released this week. U.S GDP declined by 32.9%. This officially puts the United States in a recession if you go by the 1974 rule of thumb definition established by former Bureau of Labor Commissioner, Julius Shiskin. He defined a recession as two consecutive quarters of negative GDP growth. I think, for the most part, we knew we were in a recession, this just provides confirmation. The quarter-over-quarter decline is the largest seen since record keeping started in 1947. The positive contributors in the quarter were increases in federal government spending and a reduction in imports, which adds to GDP. The decreases were led by reductions in personal consumption expenditure (PCE), exports, private inventory investment, nonresidential fixed investment, residential fixed investment, and state and local government spending. Somewhat positive news from the announcement was the negative growth of 32.9% was not as bad as the initial estimate of -34.5%.
PCE for the last month of the second quarter was better than expected at 5.6%. The expectation of growth of 5.3% came after significant declines in the previous two months. Personal income, on the other hand, decreased by 1.1% in June. Reductions in stimulus checks due to the COVID-19 pandemic contributed to the month-over-month decrease.
Durable goods orders were better than expected in June. The 7.3% growth seen in the month compares favorably with the expected 6.2%. We have now seen two consecutive months of growth for new orders. In May, new orders grew by 15.1%. The increase was led by transportation equipment orders.
Strength in manufacturing continued in July. The Markit PMI manufacturing number was 50.9. This is lower than the expected 51.3 but still positive. A reading over 50 indicates growth. The ISM manufacturing number of 54.2 was higher than the consensus expectation of 53.6.
A sore spot this week was the ADP employment survey. The report showed payrolls increased by 167,000. This is significantly lower than the expected increase of 1.2 million. Companies using up Paycheck Protection Program funds likely contributed to the significant reduction. Last month, 4.3 million jobs were added to payrolls.
Earnings reports for publicly traded companies continued this week with 77% of S&P 500 companies reporting. So far, earnings are down by 32.1%, which is 23.5% better than expected. Sales are down by 10.4%, which is 1.2% better than expected.
WEEKLY INSIGHT | JULY 29, 2020
Equities were off slightly for the week as investors pulled back ahead of a newsy week highlighted by several earnings announcements, the Federal Open Market Committee (FOMC) meeting and uncertainty on fiscal stimulus extensions. The S&P 500 was down 0.5%, this time with the NASDAQ pulling the market lower. The NASDAQ was down 1.5%, whereas domestic small caps were up 0.7%.
Economic data was light on the week. Initial jobless claims remain elevated and show a sequential increase as permanent job losses continue to mount. The U.S. Citi Economic Surprise Index has peaked after reaching the highest level in the series history, which dates to 2003. The level was twice as high as any previous reaching, meaning the economic data has been far better than forecast. Despite the high reading, the index level is less important than direction. Thus, risk assets would face a headwind as this series’ mean reverts. Adding to the near-term risk has been an increasing number of down days for the market on higher volume, while upside days have been accompanied with very light volume. Two of the highest volume exchange traded funds; SPY (S&P 500 proxy) and QQQ (large cap growth proxy), were up more than 1% on Wednesday, which was an FOMC meeting date. However, the volume was only 40-60% compared to the previous two FOMC meeting days in June and April.
The Federal Reserve left rates unchanged as they will for a very long time. They did attempt to be proactive in their commentary by saying they will do whatever it takes. They continue to emphasize upside room to the balance sheet, which the market likes to hear. Offsetting this somewhat is a widening gap between lawmakers on how the next fiscal stimulus should look. It appears no deal will be done this week, thereby removing enhanced unemployment and other stimulus measures. Further delays next week could see equity markets pull back as uncertainly rises.
We are in the heart of earnings season with roughly half the S&P 500 having reported thus far. Upside earnings surprises have been pronounced and evident in most sectors. This has been a tailwind to those companies when accompanied by favorable commentary on the current quarter. Some companies exposed to secular growth trends in health care, the internet and cloud enterprise have reported exceptional growth numbers in sales and earnings.
WEEKLY INSIGHT | JULY 22, 2020
U.S. companies continued announcing second quarter earnings this week. With 15% of S&P 500 companies reporting, earnings and sales are better than expected. Earnings growth is 14.8% higher than estimated. This positive surprise has been led by Energy and Materials sectors. Sales growth was 3.2% better than expected, led by Materials and Health Care sectors. The figure below shows how sector results are coming in relative to expectations. Current analyst estimates have earnings for the quarter declining by 41.2% and a decline in sales of 10.7%. The second quarter is expected to be the quarter worst hit by COVID-19 lockdowns. This expectation may change as more states record increasing numbers.
We saw indications of consumer strength in June. Retail sales for the month were up 7.5%. The month-over-month growth was led by growth in sales for electronic and appliance stores, furniture and home furnishing stores and clothing stores. Year-over-year (YOY), sales grew by 1.1%. The YOY growth has been led by significant increases in online sales. Growth in nonstore retailers over the period was 23.5%.
Housing was a mixed bag this week. Housing starts were better than anticipated at 1.186 million versus 1.163 million. On the other hand, the sale of existing homes was lower than expected. Sales numbers were at 4.72 million which compares unfavorably with the expected 4.9 million. The number of building permits issued was also lower than expected at 1.241 million versus 1.28 million. Despite some housing numbers being weaker than expected, we are seeing a strengthening housing market as indicated by earnings results coming in from home builders. The reopening of local economies and low mortgage rates are leading to increases in home purchases.
Unemployment insurance claims continue to be elevated. The July 11 reading of 1.3 million indicates the recovery may not be as quick as some have thought.
WEEKLY INSIGHT | JULY 15, 2020
Equities advanced on the week despite initial weakness from increasing lockdown measures across the country. The S&P 500 advanced 1.8% on the week, but this time it was led by value and laggard names. The momentum equities came under pressure causing the NASDAQ to lag with a gain of 0.6%. Small-cap domestic equities performed the best with a jump of 3.6%. Emerging market equities ended the week in the red. The Bloomberg Barclays Aggregate Bond Index advanced 0.3%.
Economic data was light on the week. Initial jobless claims remain elevated and companies are starting to cut jobs as the depth of the downturn starts to sink in. Airlines are making big cuts, and so are retailers and industrial companies. Permanent job losses are rising at the fastest pace on record.
Stocks continue to rise on COVID-19 vaccine trial headlines despite a fair amount of uncertainty on safety and timing. It is reminiscent of the trade war with China and the daily Twitter headlines that a deal was close. Market participants were leery to be short on fears of a big jump at any moment if officials said a deal was close. This dragged on for many months, keeping a floor under the market, before a rather soft deal was finally agreed to with China. Optimistic vaccine headlines usually see the cyclicals rally and the NASDAQ come under pressure. This was the case on Monday where most of the big winners in the recent rally had large drawdowns of 8-10%. Monday saw Tesla stock rise 15% in early trading, but then finish the day down 3% in a stunning reversal.
Despite these frequent one-day reversals, value stocks have been unable to demonstrate sustained outperformance. The Russell 1000 Growth Index is up 15.1% year-to-date whereas the Russell 1000 Value Index is down 13.2%. Since the beginning of 2017, the Russell 1000 Growth Index has generated almost seven times the total return of its value counterpart. Energy equities have lagged for quite some time, but financials have been soft with interest rates near the zero bound. It should come as no surprise the U.S. sector performance is following a similar path exhibited by Japan and Europe once their interest rates fell toward zero. After the ECB took rates to zero at the beginning of 2016, the MSCI European Growth Index has generated 10 times the returns of the MSCI European Value Index, with both underperforming the U.S. markets by a large amount. The same dynamic has also played out in Japan.
WEEKLY INSIGHT | JULY 8, 2020
June’s unemployment rate was better than expected despite a resurgence of COVID-19 cases in some states. 11.1% of the U.S. labor force remains unemployed. The rate, a significant increase from last year, is lower than the consensus’ estimate of 12.5%. May’s reading was at 13.3%. The report showed a reduction in the number of people who had been temporarily laid off. However, there was an increase in the number of people who have lost their jobs permanently. Unfortunately, we are seeing an increase in the number of companies unable to make it through the reduction in demand induced by COVID-19. Despite the better than expected employment picture, initial unemployment claims were higher than expected with 1.427 million people filing for unemployment insurance. This number is in line with last month’s initial claims number of 1.482 million but higher than the expected 1.350 million.
Year-over-year growth in earnings continues to be strong. As discussed in previous weeks, the number is skewed toward higher wage workers since the layoffs impacted lower wage workers the most. Earnings grew by 5% in June. Month-over-month growth tells a different story. In June, earnings decreased by 1.2%. This number is probably impacted by more people re-entering the work force, reducing the average total wage number.
A recent bright spot for the economy has been manufacturing. Manufacturing payrolls increased to 356,000. This compares with the expected number of 235,000 and last month’s reading of 250,000. Company inventories have been depleted. The pickup may reflect manufacturing companies ramping up production to supply depleted inventory.
The final Durable Orders numbers for May were released this week. Ordering grew by 15.7%. The increase was led by orders for transportation equipment. After two consecutive months of decreases, transportation equipment orders increased by 80.7% in May.
We are at the start of another earnings season. Expectations for the second quarter are low. The quarter is expected to feel the full brunt of COVID-19. S&P 500 earnings are expected to decline by 43.9% and sales are expected to be down 11.6%. The negative growth is expected to continue into the third and fourth quarters.
Over the one-week period, the S&P 500 was up 1.76%. The positive return was led by sectors that have been relatively strong through the year, including consumer discretionary, information technology and communication services.
WEEKLY INSIGHT | JULY 1, 2020
Domestic equity markets were up on the week as the second quarter ended. The weekly gain in the S&P 500 was 2.2% and helped bring the quarterly return to 20.5%. Foreign equities were negative on the week and continue to underperform domestic equities. The Bloomberg Barclays Aggregate Bond Index was up fractionally, and gold prices hit their highest level since 2013. High growth stocks continue to power ahead despite historical extremes in valuation. One example is Shopify, which has become a household name and trades at roughly twice the valuation of the high-flying internet stocks in the tech bubble of 2000. Tesla also became the most valuable car company in the world this week.
Economic data continues to be positive at the margin as the stimulus efforts work their way through the system. Durable goods orders for May jumped 15.8% and helped drive the year-over-year number to sequential improvement. Initial jobless claims were 1.4 million and remain elevated. Personal income was down 4.2% after the huge surge from government transfers in April. A continued downward move in the coming months would question the sustainability of the recovery. On the plus side, pending home sales surged 44%, which was about four times higher than any reading in the series history dating back to 2001.
The ISM manufacturing report was better than expected with new orders well ahead of inventories. This is normally suggestive of solid economic expansion in coming months. A rather stunning release was the ADP private payroll revision for April, which went from -2.7 million to positive 3.1 million. It looks like it remains good policy to be careful making assumptions on data that can be revised. S&P 500 equity futures fell about 1% following the negative ADP number last week before rallying. As the saying goes, “price is king,” and the market quickly brushed off the headline.
The Federal Reserve (Fed) along with fiscal policy remain the elephants in the room. Federal Open Market Committee minutes from their June meeting were released this week. The Fed acknowledged downside risks from fiscal policy, which could be underappreciated by the market. They punted on yield-curve control at this meeting and instead wanted to emphasize their focus on forward guidance. The new saying is that they are “not even thinking about thinking about raising rates.” The market believes them with the 5-year Treasury trading at 0.31%.
WEEKLY INSIGHT | JUNE 24, 2020
There was a decline in domestic equity markets this week. The S&P 500 Index was down 2.01%. Global increases in COVID-19 cases have led to increased fears of a pronounced “second-wave.” The Google Activity Index, the blue line in the graph below, shows increasing global mobility as lockdowns ease. More people are going out. This index measures activity based on cellphone data. We’ve also seen a recent increase in the number of new cases. The increase in new cases contributed to the market’s underperformance this week.
In other macroeconomic news, the Purchasing Managers’ Index (PMI) numbers were better than expected. The Markit Manufacturing PMI’s June reading is 49.6. The initial estimate was for a reading of 46.0. The Service PMI was lower at 46.7, but better than the expected 45. Economic activity continues to pick up as economies reopen.
The Richmond Fed Index, covering activity in D.C., Maryland, North Carolina, South Carolina, Virginia and most of West Virginia, showed better than expected activity despite growth being flat. The reading of 0 is better than the estimated decline of 3.5. At this point, any growth number that is not negative is seen as positive.
Housing reports were a mixed bag this week. Sales of existing homes were lower than anticipated in May. 3.91 million homes were sold compared to the expected 4.15 million and the previous month’s 4.33 million. New home sales on the other hand, were better than expected. May saw sales of 676,000 new homes. The expectation was for 632,000. April saw sales of only 580,000 new homes.
WEEKLY INSIGHT | JUNE 17, 2020
Equity markets fell sharply last Thursday in what was the largest drop since March. The S&P 500 was down almost 6% as COVID-19 cases are rising around the globe. Stocks would claw their way back with the S&P 500 ending down 2.4% for the week. The NASDAQ continues to be the outperformer in down markets and emerging markets held in with modest losses during the week. The Bloomberg Barclays Aggregate Bond Index was flat on the week.
Economic data came in better than expected. Retail sales posted their largest monthly gain at 17.7% for the May reading. This was well ahead of expectations, although should not be very surprising given the large jump in personal income that was highlighted in a previous Weekly Insight. This helped propel stocks to a sizeable gain on the day. The early read on regional PMI indices point to a more optimistic outlook for the manufacturing sector.
The Federal Reserve (Fed) has demonstrated a more proactive approach during this recession. The National Bureau of Economic Research recently made it official that the recession started in February 2020. The Fed announced they would begin buying individual corporate bonds instead of an emphasis on exchange traded funds. This makes it easier for the Fed to have an impact on corporate bond spreads versus the methods announced in March. Corporate bond spreads now sit right at their 10-year average in part to heavy central bank intervention.
The AAII Investor Sentiment poll shows that only 24% of investors are bullish, which is about 14% below the long-term average. They do not believe the rally is for real, possibly due to central bank actions or due to the rise of the “Robinhood” trader, which has gained a lot notoriety lately. There has been a surge in new accounts at Robinhood, Schwab, and other online brokers as the pandemic, lack of sports, and stimulus checks has propelled a jump in new traders. Warren Buffet dumped his airline stocks and then the new traders quickly bid them up 100-200% in two weeks. Hertz filed for bankruptcy, but its shares jumped 600% in a week as it appears momentum and low-dollar priced stocks are hard to ignore for new traders. These kinds of actions make it easy for investors to think it’s all a house of cards that could unravel at any moment. Despite the silliness, long-term returns are quite strong when pessimism is high.
WEEKLY INSIGHT | JUNE 10, 2020
We received some significant news from the Federal Reserve (Fed) this week. The Fed indicated they could keep rates where they are until 2022. “We’re not thinking about raising rates. We’re not even thinking about thinking about raising rates,” said Federal Reserve Chair, Jerome Powell.
Initial unemployment claims for the week ended May 30 were better than the previous month’s claim number. The reading of 1.877 million claims, despite being higher than the expected 1.8 million, shows the pressures on unemployment offices nationwide may be abating. The previous week’s number was 2.126 million. The positive trend in employment led to a decrease in the unemployment rate in May to 13.3% from the previous month’s 14.7%. The expectation was for a rate of 19.6%. Why the large variance? According to the U.S. Department of Labor, the rate was impacted by a calculation error. A portion of the error centered on how companies are accounting for workers who are on the books but absent without pay. The recommendation is these workers be classified as unemployed. This was not always the case with the employment data presented. This error has the potential to increase the unemployment rate by up to 3%.
The year-over-year increase in earnings continued. In May, earnings grew by 6.7%. As discussed in a previous Weekly Insight, the earnings growth number is artificially inflated due to the lockdowns more significantly impacting low wage jobs.
The Consumer Price Index (CPI) remains flat year-over-year. May’s price change rate of 0.10% was lower than the expected 0.20%. Energy prices are the major influences for the low number. The number is up to 1.2% after excluding energy and food. Month-over-month, there was a decrease in CPI price levels. Both core and headline CPI decreased by 0.10%.
We saw positive equity market moves this week. The S&P 500 was up 2.19%. This increase was led by strength in the Information Technology sector, up 4.52%, and the Consumer Discretionary sector, up 2.67%. We continue to see strength in the Energy sector. After the first quarter, the Energy sector was down 50%. The current year-to-date return for the Energy sector is -27.68%, which is a meaningful appreciation. Month-to-date, the sector is up 10.39%. An expected increase in demand for oil as lockdowns continue to lift is spurring the growth.
WEEKLY INSIGHT | JUNE 3, 2020
Equity markets continued to move higher this week as the re-opening process continues. The S&P 500 added 2.9% while foreign equities were especially strong. Emerging markets gained 6.6% and foreign developed jumped 6.3%. The Bloomberg Barclays Aggregate Bond Index was flat on the week as Treasury yields moved higher but were offset by strong gains in corporate bonds. The 30-year Treasury yields are at a two-month high at just over 1.5%.
Oil prices have moved up to $37 per barrel following the dramatic move to negative prices. And, as so often is the case with markets, the time to buy is at these extreme levels. The S&P 500 energy sector has returned 26% since the negative prices on April 20. This is almost double the return on the NASDAQ, which is often cited for strong performance off the March lows. Precious metals have also done well as prices have moved higher amid all the stimulus activity. The Solactive Global Silver Miners Index is up more than 60% from the March lows.
The European Central Bank upped their stimulus programs today by increasing and extending the duration of their corporate bond buying program. This comes on the heels of a large fiscal stimulus package announced by Germany this week which was treated favorably by the market. If the historically budget-focused European countries open to fiscal stimulus it would be a tailwind to economic activity. It could also be a big boost to global equity markets if there is widespread global fiscal stimulus.
Jobless claims continue to be elevated but have come off their extreme readings. Continuing claims remain north of $20 million and the expectation is that it will be many quarters before employment returns to previous levels. Personal income was up 10.5% in April. It was the largest jump on record in a series that dates to the 1940’s. How is it possible for income to jump amid one of the greatest economic contractions of all-time? Transfer payments of nearly $3 trillion filled the hole in wages. This is a major reason that equity prices have been so strong. Those unemployed have thus far had their lost wages replaced by government checks and their investments have moved higher which aids in confidence and spending patterns. However, equity markets look forward and the outlook is cloudy. The bonus unemployment benefit is set to expire at the end of July whereas additional stimulus checks face a growing political divide on their renewal terms.
WEEKLY INSIGHT | MAY 27, 2020
The S&P 500 gained more ground this week as markets reacted to the easing of lockdown restrictions across the country. Investors reacted positively to the reopening of their favorite restaurants and stores. Over the week, the index was up 2.20%. This brings year-to-date performance to -5.25%. Strength in the Financial sector, one of the weaker performing sectors year-to-date, led this week’s positive performance. The sector was up 8.96% for the week and all sectors except Information Technology were also up. The Information Technology sector remains the best performing sector year-to-date despite this week’s relatively flat return of -0.56%. These positive returns indicate the market is not anticipating a significant “second wave.” Unfortunately, the markets are not epidemiologists.
Initial unemployment claims for the week ended on May 16 remains high despite a dip from the previous week. New claims were filed by 2.44 million people, a dip from 2.69 million claims the previous week. With the limited openings of businesses, some employees are going back to work. This should have a positive impact on employment numbers.
This week saw several positive economic indications. Consumer confidence, at 86.6 was higher than the previous month’s confidence number of 85.7. This is shy of the expected 88.
We also saw strength in housing. People may be taking advantage of low mortgage rates as 4.33 million existing homes were sold, which is a little higher than the forecasted 4.3 million. There was an increase in new home sales from 22.548 million in March to 25.073 million in April. The expectation was for sales of 24.633 million. Additionally, a higher number of building permits were issued than expected, 1.066 million permits. This compares favorably with the expected 1.035 million.
The Leading Indicators Index dipped again in April, but not as much as in March. The Leading Indicators Index is a composite of 10 leading indicators tracked by the Conference Board. The 4.4% April dip compares to the previous month’s decline of 7.4%.
Manufacturing continues to be weak in May. The Markit PMI Manufacturing Index for May was at 39.8, and a reading less than 50 is considered a negative indicator. The Philadelphia Fed Index number was also low, contracting by 43.1. This index tracks manufacturing conditions in the Third Federal Reserve District. The Dallas Fed Index, tracking manufacturing activity in Texas, declined by 49.2 in May.
WEEKLY INSIGHT | MAY 20, 2020
Equity markets bounced back this week as the United States continues to outperform the rest of the world. The S&P 500 was up 5.5% and domestic small caps jumped 9.3% on the week. This outpaced gains of 2-3% among foreign emerging and developed markets. Much of the rally was aided by news regarding favorable vaccine results, although the robustness of the results has since come under critical review. Corporate bond spreads rallied after weakness in recent weeks and resulted in the Bloomberg Barclays U.S. Aggregate Bond Index gaining 0.5% on the week.
Despite the gain this week, the S&P 500 is roughly unchanged from its level in late April. Technology stocks have continued to shoot higher as lockdown has accelerated the digital transformation in both consumer and enterprise settings. Offsetting this continues to be weakness among financials. This flows into the small caps as well, which have been notable laggards for several years. The Russell 2000 Index has only managed to average a 2.8% annual gain over the last five years whereas the NASDAQ has averaged 14.3% and 30-year U.S. government bonds have averaged 7.2%.
The push toward negative interest rates continued as the United Kingdom sold three-year government bonds with a negative yield for the first time ever. The Federal Reserve in recent commentary has suggested a strong desire not to endeavor below the zero bound; however, they did not completely rule it out. Fed fund futures imply a slightly negative interest rate by year-end. The Federal Reserve prefers to use the balance sheet, which is now at $6.9 trillion versus $4.1 trillion at the end of February.
The rhetoric on China remains strong and now concrete actions are taking place. There has already been a strong push to remove all investment in Chinese companies from government pension funds. This week the Senate passed legislation that would boost the oversight of foreign companies listed on U.S. stock exchanges. Companies would also need to certify they are not owned or controlled by a foreign government. Failure to do so could lead to de-listing from U.S. exchanges. This follows on the heels of a high-profile Chinese stock fraud, Luckin Coffee, that was highly touted by the financial media. This stock has seen a total wipe out in the last several weeks following release of the news. There are several widely owned U.S. and Chinese stocks that could be prone to a shock if retaliatory actions enter a feedback loop.
WEEKLY INSIGHT | MAY 13, 2020
The door slowly closes on another earnings season as 90% of S&P 500 companies have reported negative earnings and sales growth for the first quarter of 2020. Earnings have declined by 12.2% for the quarter, which is 3.1% better than expected. The decline in earnings growth was led by shared drops in the earnings of consumer discretionary and financial companies. Car companies were among the biggest detractors from growth within the consumer discretionary sector. Banks and consumer financial companies were the significant detractors in financials. Sales declined by 1.7%, 1.0% worse than expected. These results are meaningfully negative. The pessimism continues as we navigate the second quarter, as earnings and sales growth numbers are expected to be even worse.
We saw a significant increase in April’s hourly earnings growth numbers. Month-over-month, earnings grew by 4.7%. Year-over-year, they were up by 7.9%. Unfortunately, the comparison over the previous month is not necessarily fair. COVID-19 has had a larger impact on the employment of workers at the lower end of the wage scale. This increase in low wage unemployment has led to an artificial increase in the hourly earnings growth rates as the weighting to higher wage earners increases.
The U.S. unemployment rate is the highest it has been since this number has been tracked. April’s reading of 14.7 million gives a strong indication of the devastating impact of COVID-19 on people and the economy. There is little solace in the reading for the month being better than the expected rate of 16%.
3.169 million additional people filed for unemployment insurance the week that ended on May 2. This is 169,000 more people than expected.
We saw some marginally positive economic news this week. The preliminary first quarter productivity number was better than expected. The announcement of a first quarter decline of 2.5% was better than the forecasted decline of 6.0%.
Companies reduced inventories by less than expected in March. There was a contraction of 0.80% compared to the expected 1.0%.
Energy continues to have a significant impact on inflation numbers as seen in the April Consumer Price Index (CPI) numbers. Year-over-year, core CPI, which excludes food and energy, grew by 1.4%. Including food and energy, CPI grew by an anemic 0.30%. The expectation is for a continuation of flatness for price levels in May.
WEEKLY INSIGHT | MAY 6, 2020
Equities pulled back this week as the rhetoric on China intensifies. The S&P 500 was down 3.1% while small caps fell 7.2%. Emerging markets and foreign equities were also in the red. Yields failed to rally and resulted in the Bloomberg Barclays U.S. Aggregate Bond Index also falling into the red for the week. Despite the equity drop, oil prices were up 59% on the week and over 100% in the last two weeks.
Personal consumption expenditures fell 7.5% in March. This far exceeded the previous low of -2.1% seen in 1987. The rest of the economic data was at or near record lows. ADP reported 20 million job losses for the month of April, which was foretold by the weekly jobless claims. The monthly employment report will come out Friday but should have little to no effect on the market as the data is mostly old news.
Despite the record drop in economic data, more than 15% of the Russell 1000 companies, a proxy for larger public companies, are up year-to-date. The winners are mostly comprised of biotech companies that could reap increased demand due to the virus, as well as technology companies viewed as leaders of the next growth phase. Amid the constant focus on technology companies, the NYSE Arca Gold Miner Index is up 14.5% this year to little fanfare. Gold has outperformed the S&P 500 by 26% year-to-date. It is the largest outperformance in the first four months of the year since 1973.
Another interesting development is copper prices. The cyclically sensitive commodity is down year-to-date; however, the price is holding well amid economic data on par with the worst in history. The current price around $2.38 per pound is well above the 2008 low of $1.25 per pound, as well as the average price of $1 per pound in the 1990s. It has been noted that copper supplies are insufficient to meet the anticipated needs for emerging market housing growth as well as technology innovations such as electric vehicles.
It could be possible the higher lows on copper prices is foretelling rising future inflation, but the near-term inflation expectations continue to fall. Inflation expectations remain depressed as low rates beget low rates. High debt levels pull forward demand, which in turn pulls down future growth. The highest 10-year government bond yield in developed markets is Iceland at 2.38%. Only three out of the 25 developed countries exceed 1%.
WEEKLY INSIGHT | APRIL 29, 2020
There was a significant contraction in GDP in the first quarter of 2020. Initial numbers show a contraction of 4.8%. We have not seen such a sharp drop since the financial crisis. The deceleration was led by weak consumer spending. The number could have been worse had it not been for an increase in government spending. A larger contraction is expected in the second quarter.
Manufacturing continues to be weak. The Markit PMI manufacturing number for April came in at 36.9, which is lower than the expected 38.3. Purchasing managers’ confidence has been significantly impacted by the virus. The Markit service number was lower than the already low expectation. The service number for the month was 27 compared to the expected 32.5. The PMI is a diffusion index. Numbers lower than 50 are indicative of a contraction.
Durable goods orders for March were down by 14.4%. Orders for transportation equipment led the decrease. The industry saw new orders decline by 41%. Excluding transportation, new orders were down 0.2%.
Consumer confidence dipped to 86.9 in April from the previous month’s 118.8. This number is in line with the consensus estimate of 85. This number could dip even more as the unemployment rate increases. Initial unemployment claims for the week ending on April 18 was 4.427 million. Total claims are expected to increase as nationwide shutdowns continue.
The S&P 500 is up 5% over the last week. This comes amid indications that local economies may be opening after lockdown closures. Fears of a “second wave” or resurgence of the virus remain. The last week takes month-to-date performance for the index up to 13.86% and narrows the year-to-date loss to -8.45%.
We are in the midst of 2020 first quarter earnings season. Earnings growth for the quarter is not comparable to previous quarters due to the pandemic and impacts on global economies. With 31% of companies reporting, earnings contracted by 19.4% from last year’s first quarter. Year-over-year sales growth remains positive at 1.6%. We expect companies to feel the full brunt of the pandemic in the second quarter. Current estimates have earnings contracting by 30% and sales down by 9%. The best performing sectors this season have been companies in defensive sectors like consumer staples, utilities and healthcare.
WEEKLY INSIGHT | APRIL 22, 2020
Equities had two consecutive down days but bounced back to finish the week in the green. Small caps led the way with gains of 1.5% while foreign equities lagged. Yields moved lower with the five-year yield setting an all-time low. Corporate bonds lagged as spreads paused following significant tightening post Federal Reserve (Fed) intervention. The S&P 500 has staged a notable recovery this month with gains of 8.4% and is leading global markets out of the lows. The current gains are nearly double those seen in domestic small caps and emerging market equities, which were also the laggards during the sell-off.
The news of the week was oil prices falling $55 in one day to close at -$37/barrel. This is the first time oil, one of the most widely used commodities in the world, has seen prices go negative. And not only that, but once participants realized the price could go negative, it created an epic drop into the close. The negative price was driven by lack of storage, thus making physical delivery impossible for those long in futures contracts. It is a sign of the massive demand destruction currently taking place in the economy and occurred despite the largest OPEC cut in history just days earlier. The more damaging price action happened the next day when all the contracts due in the next couple of months started dropping 40-50%. Tanker rates are surging as floating storage is reaching capacity as well. A bounce finally appeared on Wednesday and helped take some pressure off equity indices.
The economic data continues to set records on the downside. Jobless claims are up more than 20 million over the four-week period. Bank of America did note that spending for those receiving CARES Act stimulus payments increased almost immediately. Amid the sudden stop in economic data is a tremendous amount of central bank and government stimulus. The Fed has engaged in several programs in coordination with legislative support. The domestic money supply, as measured by M2, is up 11% versus the prior year. This is the highest since 1983. The Fed balance sheet is up over 50% in just two months to $6.3 trillion.
Earnings season is gathering momentum and getting some attention. Thus far, S&P 500 earnings are down a little more than 21% for the first quarter. Earnings surprises are also negative. Guidance has been removed by most companies given the extreme uncertainty on when economic growth will resume.
WEEKLY INSIGHT | APRIL 15, 2020
March and first quarter 2020 data continue to come in. The expectation has been for reported numbers to be relatively bad. In some cases, the numbers are worse than expected. One of these cases is retail sales. Retail sales were down 8.7% from February in March. The expectation was for sales to be down 7.0%. We saw weak numbers from businesses that have taken the brunt of stay-at-home orders and self-isolation. Food services and drinking establishments saw a decline in sales of 26.5%. Motor vehicle and parts dealers and furniture stores have also been significantly hit. These businesses saw declines of 25.6% and 26.8%. April’s retail sales numbers are expected to be worse than March’s numbers.
Outside of the demand slow down, Consumer Price Index (CPI) numbers were also heavily impacted by oil pricing pressure. Headline CPI was down 0.40%. Worse than the expected -0.30%. Excluding food and energy, core CPI was down 0.10%. There are some concerns we may be entering periods of disinflation. Year-over-year (YOY) CPI was 1.5%, this compares with the previous month’s YOY number of 2.3%. Core CPI YOY was at 2.1%.
Initial jobless claims stayed above six million. The reading as of the week that ended April 4 was 6.607 million. This compares to the prior week’s, 6.867 million. The expectation is for this number to increase as the U.S. economy goes through another round of layoffs.
Hourly earnings grew by 0.40% over the previous month in March. Earnings grew by 3.1% YOY. Month-over-month and YOY numbers are the same as February’s numbers.
Consumer optimism for the economy continued its decline. The Michigan Sentiment Indicator was at 71. This is down from the previous month’s 89. The expectation was for a reading of 78.
Weakness in manufacturing continues. The Empire State Index, a Federal Reserve survey of manufacturing in New York state, was down to -78.2. The expectation was for it to go down to -33.9.
Energy went from being the best performing sector last week, up 23%, to the worst performing this week, down 6.49%. The sector is down 45.57% for the year. The best performing sector this week was Consumer Discretionary, despite weak retail sales. The performance was led by online and direct marketing retail. The S&P 500 index was up 1.25% for the week. Year-to-date, the equity index is down 13.34%.
WEEKLY INSIGHT | APRIL 8, 2020
Equities were up sharply on the week as the S&P 500 gained 11.4%. Small caps were also up 11%, while beaten up industries had some big gap ups in prices. Treasury yields were higher at the back end of the curve as investors begin thinking about virus sanctions being lifted. The COVID-19 news flow is more positive at the margin and this has helped equities rally more than 20% from their lows.
Economic data is starting to get ugly, but everyone knows this, so there is little predictive power in the numbers. Jobless claims put in back-to-back weeks of 6.6 million following 3.3 million during the first weekly spike. Retail sales are expected to be up in March according to Bank of America thanks to a huge spike in food sales, but credit card usage has fallen off a cliff. Bank of America debit and credit card data is showing a drop in March that is three times the largest drop in 2008. Earnings season is getting underway. Thus far, most companies are reporting weak results and withdrawing guidance. The stocks are generally holding up after results as a negative catalyst is removed, which allows traders to re-enter positions.
Last week may have been the peak in doomsday forecasts. Wall street was in a race to see who could publish the lowest GDP forecast. The United States was supposed to be entering the worst of the situation and with it came all the scare headlines. It was no surprise markets would have a huge rally as it was almost impossible to have the rhetoric turn worse. Just a marginal improvement in tone sent equities surging.
The Federal Reserve (Fed) continues to roll out programs to aid the situation. Some appear to be working as Treasury markets are functioning better. Corporate bond spreads are tightening for those deemed to be survivors. Corporate bond supply has surged as companies look to raise cash when they can, not when they must. Previously the Fed said they would buy investment grade bonds that met certain criteria. Today they announced they will buy bonds that were downgrade to high-yield after March 22 and buy high-yield exchange traded-funds. They are also expanding into other areas of the market. Some expected this to happen eventually, but to see it implemented (with risk assets rising) demonstrates a more preemptive mindset.
WEEKLY INSIGHT | APRIL 1, 2020
Investment markets continue to react to the COVID-19 pandemic. Wide daily swings in performance have become the norm over the last few weeks. The $2 trillion virus relief package, the CARES Act, was approved by the Senate and the House, and President Trump has signed it. Now, the Department of Treasury is figuring out how to make it happen. The expectation is for qualified individuals to start receiving checks in the coming weeks. However, one question keeps coming up. Will the fiscal stimulus be enough? It is difficult to tell, especially since the duration of pandemic lockdown is unknown.
Domestic equity markets were flat for the week. The return of -0.17 hides the daily volatility we saw this week. Defensive sectors like consumer staples and health care led in performance. The sectors recorded positive performance of 4.94% and 4.69% respectively this week. Company earnings numbers will be coming in the next couple of weeks. This should give an initial indication of the impact the virus has had on U.S. publicly traded companies.
We are starting to see an impact on macroeconomic numbers. The big macro news from the week is the initial unemployment claims, as 3.283 million people filed claims for unemployment insurance. This is the highest this number has been since it started being recorded. The number of unemployment claims is expected to double.
Manufacturing numbers rolling in are turning negative. The Markit PMI Manufacturing for March was at 48.5. This is slightly lower than the expected 48.6. The PMI is a diffusion index, therefore numbers below 50 reflect a contraction. The ISM Manufacturing number for March was also released and is another diffusion index. The reading for the month was 49.1. Better than the expected 46, but still less than 50. The PMI and ISM numbers have historically been leading indices.
Kansas City Fed Manufacturing numbers for March weren’t that much better. The number for the month was -17, with an expectation of -8. The index measures manufacturing activity in the Tenth Federal Reserve district.
However, consumers remain confident. The announcement of 120 was higher than the expected 110, but lower than the previous month’s 132.6. Consumer sentiment as measured by the Michigan Sentiment Indicator was at 89.1. This compares to the expected 90.1 and the prior month’s 95.9.
WEEKLY INSIGHT | MARCH 25, 2020
It’s been a week of positive returns in domestic equity markets, and that feels good to write. The S&P 500 return over the week was 3.27%. This comes on the heels of the potential passage of stimulatory fiscal and monetary actions. The Federal Reserve monetary actions have been going on for a couple of weeks. A question now is, will the Senate’s $2 trillion virus relief package pass the House. If it does pass the House, how effective will it be? Another contributing factor to the positive move in markets this week has been ongoing discussions on direct government investments in struggling companies. These conversations have focused on cash infusions to airline and aircraft manufacturing companies.
The energy sector led in returns this week trading up by 22.29%. The sector is down 51.21% year-to-date. The consumer discretionary and industrial sectors closed out the top three performing sectors with returns of 10.88% and 8.02%. This goes to show some investors are putting risk back on the table. Defensive sectors that have held up relatively well year-to-date, saw weaker relative performance this week. One-week performance numbers for consumer staples, utilities and health care were -7.60%, -6.21% and -2.54%. These sectors are among the better performing sectors year-to-date.
Economic numbers coming out do not fully reflect the economic impact of COVID-19. This week’s numbers show positive housing moves in February. The existing home sales number of 5.77 million was 250,000 homes better than expected. The prior month’s number was 5.42 million. New home sales were also better than expected at 765,000 compared to the expected 745,000. The number was a little lighter than January’s 800,000.
Durable goods orders were better than expected in February. The reading of 1.2% compares positively to the expected -0.95%. The growth was led by increases in transportation equipment orders and nondefense aircraft and parts orders. A March dip in durable goods orders is expected.
Initial manufacturing numbers for March shows some weakness. The Markit PMI Manufacturing number of 49.2 is below the 50 threshold which indicates economic weakness. The number is better than the expected 42.5 but lower than the previous month’s 50.7. The Philadelphia Fed Index, which tracks manufacturing activity in the Third Federal Reserve District was significantly lower than expected at -12.7. The expectation was for a reading of 10, down from last month’s 36.7.
WEEKLY INSIGHT | MARCH 18, 2020
Markets continue to sell-off as the western world shuts down business to minimize the spread of COVID-19 (coronavirus). The S&P 500 was down 12.5% on the week and held up better than other global indices. Domestic small caps were down 21.5% on the week and 41.7% from their highs a couple weeks ago. Emerging market equities are coming under stress as the U.S. dollar is staging a sharp rally. Diversifying assets are providing no help as hedge fund liquidations and other strategies are forced to sell bonds along with all assets. The Bloomberg Barclays Aggregate Bond Index was down 4.0% on the week and gold was off sharply.
Economic data from February has little meaning and the market is turning to more high frequency data. One example is data provided by OpenTable, an online reservation company. On the last day of February online restaurant bookings throughout the country were up 2% versus the prior year. On March 17, the number had fallen all the way to -84%. Traffic congestion is another indicator and it also shows staggering drops across the globe.
As markets drop daily the central banks are rolling out the 2008 playbook to shore up confidence. We highlighted some of these in yesterday’s Insight Extra. The latest one was released last night and included a backstop of the $800 billion in prime money market funds. The European Central Bank in an emergency meeting continued with the alphabet soup of programs by announcing the Pandemic Emergency Purchase Program (PEPP). The PEPP will purchase up to €750 billion of assets. This expands on an existing asset purchase program but does go further by including more eligible securities. Despite aggressive central bank action, the market is waiting for policy from Congress and the Treasury Department on a path forward that will stem the contraction and fear feeding into the credit markets.
Corporate bond spreads have widened materially in the last week. The key company in focus remains Boeing, whose stock has seen an unprecedented fall of roughly 75% in about a month. Once a staple of stability, the market is pricing default probabilities that are two times as high as they were during the 2008-2009 recession. This of course has significant knock-on effects to its suppliers such as General Electric. This feedback loop continues to drive markets and will likely remain in place until appropriate policy action is enacted. Eventually this will happen, but politicians often underappreciate the speed in which action needs to be taken. Thus, risk assets overshoot to the downside.
WEEKLY INSIGHT | MARCH 11, 2020
Global equities sold off sharply on the week as COVID-19 (coronavirus) headlines accelerated and became more dire. The S&P 500 was down 12.4% on the week while small caps fell more than 17%. Emerging markets fared better with losses of 8.8%. Despite an epic rally in Treasury yields, the Barclays Aggregate Bond Index was down 0.5% as corporate bond spreads widened significantly. As of this morning, S&P 500 futures were pointing to additional losses of about 5%. Overnight saw some real selling that resembled historically well-known bear markets. Thailand was down 10% and India was down 8%. European banks have fallen 40% in less than a month.
Headlines are becoming impossible to keep up with. The latest includes a travel ban from President Trump to continental Europe for 30 days. The NBA has suspended the season as players have tested positive for COVID-19. The NCAA will play games with no fans. The entire U.S. service sector is facing an abrupt halt that looks to be unmatched in recent memory. It is becoming more apparent that a recession is inevitable, but the duration of the virus spread remains the wild card that will move markets going forward. The other obvious factor is how extreme and how quickly the Federal Reserve will increase their balance sheet and engage in further asset purchases. This appears to be what the market wants and the Fed meeting next week will likely prove pivotal in whether we see a temporary bottom.
The Dow Jones Industrial Average, which dates back to the 19th century, had it fastest 20% drawdown from a market peak in its history. It took less than 20 days to reach the classic definition of a bear market. It has been hypothesized the higher, and growing, use of exchange-traded funds would lead to speedier selloffs, as there are fewer active managers to support the market via buying on weakness. This does appear to have turned into reality. The other key data point is bond yields across the curve hit record lows.
As markets face sharp selloffs, it will cause some securities to do better and some to do worse. Therefore, with a market down 20% it is inevitable some securities will be down 40% or more. This is a basic fact of every sharp market drawdown. What is relevant is the management of portfolios, as each security serves a purpose in reaching the appropriate risk-reward target. This should help alleviate the human instinct of concern or stress over the worst-performing securities.
WEEKLY INSIGHT | MARCH 4, 2020
It has been a see-saw week with equity markets seeing both highs and lows. The coronavirus and reactions to the virus continue to significantly impact performance of investment markets. Equity markets took a big dip last Thursday, after global increases in the number of coronavirus cases was reported. This is despite the number of Chinese cases leveling off. The S&P 500 Index was down 4.4%.
The index traded down a little more on Friday. However, on Monday, markets whipped around and recorded a one-day performance of 4.6%. The positive performance was attributed to commentary from the Federal Reserve (Fed) saying they were willing to do whatever it takes to prevent an economic slowdown. Markets got excited for the potential of rate cuts. Markets changed their tune when the actual cut happened. Tuesday saw a dip of 2.8% after the Fed announced they were cutting the Fed Funds Rate by 50 basis points.
The thought on the adverse reaction is that the cuts, which came two weeks before an official meeting, signaled the anticipated economic impact of the virus was worse than expected. Why else would there be an emergency mid-cycle cut? Fed Chair, Jerome Powell, clarified in statements later the cut was done before the meeting because the Federal Open Market Committee (FOMC) had decided to go ahead with the cut. The FOMC board members did not see the point in waiting for a meeting if they had decided to cut rates. Wednesday saw a significant appreciation in the S&P 500. It closed the day up 4.2%. The swing could be the market settling to the rate cut and also, potentially as a result of Super Tuesday primary results.
The equity market was not the only place with heightened activity. It’s been a bit of a ride in the fixed income markets too. The 10-year Treasury yield hit a new record low last week. Since then yields have dropped an additional 40 basis points to break through 1.00%. It was the largest 10-day decline in yields since 2011, and it all started with yields already close to record lows. On top of the Fed cut, the market is pricing in slightly more than 50 basis points in an additional cut at the FOMC meeting in two weeks. Historically speaking, 50 basis point emergency cuts do not mark a bottom, but rather see yields continue to fall and equities struggle in the near-term. Therefore, it might not be a shock to see the market anticipating the zero bound to be hit again, despite hope that the United States wouldn’t follow the scenarios that have played out in Japan and Europe.
WEEKLY INSIGHT | FEBRUARY 26, 2020
Yesterday’s Insight Extra featured commentary surrounding the coronavirus. Therefore, we won’t dive too deep on that topic again today. We will, however, discuss the impact on S&P 500 one-week performance. The index is down 7.94% and all sectors are down for the week. The sector with the worst performance continues to be Energy, which is down close to 13%. The Information Technology sector has seen the starkest turnaround. A week ago, the sector was up 12% for the year, leading it to be the best performing sector in the index. Over the last week, Information Technology was the second worst performing sector, down 9.87%. Now the sector is up 1.01% for the year as of yesterday. Concerns around supply chain disruptions have contributed to the negative performance of the Information Technology sector. Real Estate and Utilities sectors are holding up the best. They are two of the three sectors with positive returns for the year. A flight to safety has likely contributed to the resilience of these two. They are up 3.22% and 4.14% respectively for the year.
Earnings season is ending. A little over 90% of S&P 500 companies have reported. This week’s reports reinforced the better than expected earnings that have come in previous weeks. Based on the companies that have reported, earnings grew by 3.4%. We don’t expect the remaining 10% of companies left to report to meaningfully impact this growth number. This growth in earnings is 3.1% better than expected. We have also seen sales growth of 6%, which is 1.8% better than expected. The top and bottom-line growth from the fourth quarter 2019 was expected to continue into the first quarter of 2020. However, these expectations for the quarter are beginning to turn negative due to the virus. As mentioned in yesterday’s Insight Extra, a main concern is the disruption of supply chains caused not just by the virus, but by countries reacting to the virus.
In fixed income markets, interest rates continue to decline as investors take risk off the table and chase the safety of bonds. The 10-year closed yesterday with a yield of 1.33%. This is the lowest number in the 30 years of data we reviewed.
WEEKLY INSIGHT | FEBRUARY 19, 2020
The impact of the Coronavirus on the U.S equity markets was somewhat muted this week. The S&P 500 saw a gain of 0.40%. A contributing factor to the gain is better than expected earnings reports from U.S companies. With a little over 80% of companies reporting, earnings growth has been 5.1% better than expected at 3.9%. Sales growth has been in-line with expectations at 4.1%. This is a positive surprise of 1%. The growth in earnings has been led by the Utilities sector with growth of 15.9% and the Financial sector with growth of 12.4%. Growth in sales has been led by the Financial and Healthcare sectors at 15.8% and 12.7%. Energy continues to be a drag not just on performance, but on growth too. Earnings for the sector have declined by 40.8%. Sales are down 6.6%.
Headline Consumer Price Index (CPI) numbers for January came in better than expected this week. Economists expected a year-over-year reading of 2.4%, and they got 2.5%. The reading compares to the Federal Reserve’s preferred measure of inflation, Personal Consumption Expenditure (PCE), year-over-year reading of 1.6% for December. The January CPI reading is the biggest gain since October 2018. The growth was led by increases in fuel costs. Energy pricing grew by 6.2% over a year ago. Excluding food and energy, CPI grew by 2.3%. Month-over-month, CPI grew by 0.10%. This is lighter than the expected 0.20%. Low energy prices for the month contributed to the lower than expected number. Excluding energy and food, CPI was up 0.2% over the month. Increases in the price of rent, clothing and airline tickets contributed to the number.
Retail sales grew by 0.30% in January. This is in-line with expectations but lighter than the average January numbers. Clothing store sales were a drag on the sales number. Those sales declined by 3.1%. The biggest growth contributors were building materials and garden equipment stores like Home Depot. Sales in the segment grew by 2.1%.
Business Inventories stayed flat in December with growth of 0.10%. The consensus expectation was for growth of 0.10%.
The masses are still optimistic on the economy. The Michigan Sentiment preliminary February numbers have the index at 100.9. This shows an increase from January’s 99.8. The expectation was for sentiment to dip to 99.1.
WEEKLY INSIGHT | FEBRUARY 12, 2020
Global equities were positive on the week. The S&P 500 gained 1.4% and outpaced small cap domestic stocks. Emerging markets bounced back a little with gains of 1.9%. The Bloomberg Barclays Aggregate Bond Index gained 0.3% on the week. Panning out to the year-to-date timeframe, we already see some divergences becoming evident. The trends of the last several years appear to be regaining momentum. The S&P 500 is up 4.8% year-to-date whereas small caps are up just 1.3%. Emerging markets are down on the year and foreign developed is up less than 1%. The Russell 1000 Growth Index is up 8.2% versus a much smaller gain of 1.4% for the Russell 1000 Value Index.
Non-farm payrolls advanced 225,000, which exceeded expectations. Benchmark revisions took away more than 500,000 jobs for 2019, which was foreshadowed in earlier publications. Still, employment growth of 1.4% versus the prior year is well ahead of the working age population growth. On the negative side, job openings have been in free fall, now down 14% versus the prior year. This is a worrisome sign but is not confirmed by other indicators. The labor market diffusion index remains strong with a majority of industries increasing employment.
According to FactSet, with 64% of the companies in the S&P 500 reporting fourth quarter 2019 results, the blended earnings growth rate is 0.7%. The percentage of companies beating their earnings per share estimate as well as the earnings surprise percentage are below the five-year average. Forward guidance has also been weak.
The Euro has weakened of late and now sits at its lowest level since 2017 relative to the U.S. dollar. Despite this, gold prices remain elevated and near a seven-year high. Gold prices have been supported by increasing central bank asset purchases and low real yields. Other commodities have been hit hard on concerns Chinese demand will be weak due to the virus outbreak. Copper fell for 13 straight days, a record, but has since made a small bounce in recent days. Oil prices fell sharply to trade under $50 a barrel despite trading above $65 in the early part of the year. Looking forward there remains several catalysts such as a clarity on who will emerge in the Democratic party and whether the virus outbreak will become more of a global threat.
WEEKLY INSIGHT | FEBRUARY 5, 2020
The preliminary Gross Domestic Product (GDP) growth number for the fourth quarter of 2019 was released this week. Slow growth is what was expected, and slow growth is what we got. The nation’s GDP grew by 2.1% in the quarter, right in-line with the previous quarter’s growth. Surveyed economists expected slower growth of 1.9%. The growth was led by increases in Personal Consumption Expenditure (PCE). The expectation for December was for a PCE increase of 0.2%, which would have been an increase of 0.1% from the previous month. What we got instead was an increase of 0.3%. The growth in PCE was led by a $4.4 billion increase in spending on services with healthcare spending contributing the most. Additionally, $2.5 billion was spent on goods.
These results contribute to annual headline PCE growth of 1.4% and Core PCE growth of 1.6%. The PCE is the Federal Reserve’s (Fed) preferred measure of inflation. The annual reading is lower than the Fed’s target of 2%.
Federal government spending, state and local government spending, residential fixed investment and exports were the other contributors to GDP growth. The detractors from growth were private inventory investment, nonresidential fixed investments and imports. The annual growth of GDP in 2019 from 2018 was 2.3%. In 2018, GDP grew by 2.9%.
Personal Income grew by 0.2% in December. This was less than the expected 0.3% and the previous month’s 0.4%. A decrease in farm subsidy payments contributed to the lower than expected number. Increases in employee compensation and personal interest income more than made up for the decreases, leading to growth instead of a contraction.
Consumers remain optimistic as measured by the Michigan Sentiment Indicator. January’s reading for the indicator was at 99.8. The expectation was for a reading of 99.1, the same as last month’s reading.
We are finally seeing some strength in manufacturing. The Markit PMI Manufacturing Index ended January with a final reading of 51.9, better than the expected 51.7. The ISM Manufacturing Index, which dipped below 50, is back above the threshold. The reading of 50.9 shows strength, especially since the expectation was for the reading to be 48.5, higher than the previous month’s 47.8. The Markit and ISM indices are diffusion indices. A reading above 50 is generally a positive sign.
WEEKLY INSIGHT | JANUARY 29, 2020
Equities turned down as coronavirus fears offered an easy opportunity to take profits. The virus could still be underappreciated given the large number of cases and uncertainty on key attributes. For instance, if the virus can be spread when patients are asymptomatic, then there is the potential for a far-reaching effect with significant impact on global supply chains and travel-related industries. The economic impact would likely be more severe than the analogy to SARS that struck Asia in 2003. After the first case appeared in the United States last week it was no surprise few traders wanted to be long, or buy, over the weekend when new cases could jump. The S&P 500 fell 2.5% on Thursday and Friday but recouped some of the losses to finish the week down 1.4%. Emerging markets were down 3.2%. Bond yields fell in a flight to safety as the 10-year Treasury now yields 1.58%, its lowest level in more than three months.
Initial jobless claims were once again extremely low. The Conference Board Leading Economic Index has stabilized at levels indicative of very weak, but not recessionary, economic activity. New home sales missed expectations but were still up a robust 23% versus the prior year. Core capital goods orders missed expectations by a lot but improved versus the prior year where they were lapping a very weak December 2018 number. This is when uncertainty peaked on a confluence of trade war and federal funds rate hike fears.
The Federal Reserve (Fed) left interest rates unchanged and made little amendments to their statement. The press conference emphasized the desire to get inflation up and thus a higher threshold is needed to raise rates. Again, the market took this as a reason for yields to move lower, while ignoring the fact that higher inflation is a detriment to fixed income returns. The market has made the bet the Fed will try to get inflation higher by cutting rates at the first opportunity but fail to generate inflation. The key repo operations will be extended until April and the Fed has voiced a desire to attempt to back away. It is a popular opinion that the Fed’s repo operations have supported global risk assets in recent months, so there could be plenty of volatility if the Fed does follow through and attempt to back away.
WEEKLY INSIGHT | JANUARY 22, 2020
Fourth quarter earnings reports have started coming in and more companies are beating expectations than not. Close to 12% of S&P 500 companies have announced so far. Of the companies that have announced, 67% reported earnings above consensus, 9% in-line with consensus and 24% below consensus. Revenue for 69% of the companies reporting was above expectations with the remaining 31% below. This shows positive surprises of 4.2% and 1.2% for earnings and sales. So far, growth in earnings is positive at 0.7%, however the expectation in the coming weeks is for weaker numbers. The current expectation for fourth quarter earnings growth is to be negative. Of course, we hope this is not the case and positive surprises continue. On the other hand, sales growth is expected to be positive. The Utilities and Financials sectors have led the growth in earnings for the quarter. Energy, Materials and Consumer Discretionary have detracted from fourth quarter growth. The S&P 500 index is up 0.15% for the week and 2.82% year-to-date.
As mentioned above, there has been some weakness in the Consumer Discretionary sector. This is despite better than expected December retail sales numbers. Retail sales grew by 0.3% in December from the prior month, which is in-line with expectations and the previous month’s growth. This was also the third month of growth in retail sales. Yet, this number was dragged down by auto sales. Sales growth goes up to 0.70% if you exclude autos, which detracted by 1.3%.
In 2019, retail sales grew by 3.6% over 2018. This growth was led by strong numbers from e-commerce retailing of 13.1%, restaurants and bars at 4.4% growth and despite December’s weakness, growth in autos of 4%. Purchases of electronic appliances declined by 3.5%. Making this the worst growth seen across the categories.
We closed 2019 with strength in housing. Construction started on 1.608 million homes in the month. Meaningfully better than the expected 1.379 million and the prior month’s 1.375 million. Existing home sales also saw a jump with 5.540 million existing homes being sold in December. The expectation was for sales of 5.435 million units.
November Business Inventory numbers were not positive. Business Inventories dropped 0.20% in the month, which is a larger decline than the expected decline of 0.10%. The decline was led by drops in retail inventories and motor vehicle inventories.
WEEKLY INSIGHT | JANUARY 15, 2020
Equities continued to run as we hit the middle part of the month. The S&P 500 added another 1.2% for the week. Emerging markets were up 2.4% and even bonds advanced as the Barclays Bloomberg Aggregate Bond Index gained 0.6% on the week. The feared rebalancing and tax-loss selling never materialized, as the S&P 500 has gone over a month without back-to-back down days.
Non-farm payrolls were released late in January and advanced 145,000 versus the prior month. Weekly earnings have been rolling over significantly in recent months, but the unemployment rate remains unchanged at just 3.5%. Consumer price inflation was up 2.3% versus the prior year, but this was slightly short of expectations.
The United States and China finally signed a trade deal of sorts. Tariffs will remain for a chunk of Chinese goods and China will buy more U.S. products. The rest remains vague based on the language used and it is easy for either party to back out of the agreement. Maybe the biggest market moving factor is the currency agreement whereby the United States hopes China strengthens their currency. A weaker dollar is very important to alleviate some of the near-term stresses and imbalances in the global system. The Chinese currency has strengthened more than 4% over the last several months. Instead of a “sell the news” event, they leave open the prospect of a phase two agreement to pump the market as needed.
Earnings season is getting underway despite being a bit under the radar. According to Factset, fourth quarter 2019 earnings are expected to decline 2.0%. If realized it would mark four straight quarters of year-over-year earnings declines. We only have a sliver of companies reporting, but thus far they are beating the low expectations on a consistent basis. For this year, analysts have once again penned the usual 9-10% earnings per share growth number. However, 2018 was one of the rare years where earnings estimates moved higher throughout the year, yet the equity markets finished negative. Last year saw this number come down hard from 10% toward 0%, yet equities were up 30%. The key difference in the two years was the Federal Reserve (Fed) tightening versus cutting interest rates. Thus, earnings are flying under the radar as markets focus on the Fed and how their temporary repo market operations that began in September become more permanent by the day.
WEEKLY INSIGHT | JANUARY 8, 2020
The year started with an event that caused volatility in oil markets. The drone strike of the Iranian General, Qassem Soleimani, led to swings in the energy markets. The price for WTI Crude Oil shot up by 3% the day the strike was announced. Over the last week, the price for the commodity peaked at $63.27/barrel and the price as of yesterday’s close was down to 59.61. The close to 5% decline on January 8 came after de-escalation rhetoric. The Energy sector underperformed the broad market in 2019 and predictions for 2020 are mixed. Unpredictable global politics have an outsized impact on energy markets.
Coming into 2020, manufacturing continues to be a concern. December numbers for the Markit PMI Manufacturing Survey were a little lighter than expected at 52.4 but still in positive territory. This index is a diffusion index where 50 denotes no change over the prior month. The expectation was for a reading of 52.5. On the other hand, the ISM Manufacturing Index, also a diffusion index, came in at 47.2, lower than the expected 49 and in negative territory. There’s a higher weight to future growth expectations in the Markit number than the ISM number. Historically, the Markit number has been more accurate.
Consumer credit dropped to $12.5 billion in November from $19 billion in October. This decrease is closer to the one-year and five-year averages of $15.12 billion and $14.64 billion. The decline was led by a drop in revolving credit. Annually, consumer credit is up 3.6%.
Car sales numbers were released in December. Over the period, 16.7 million light vehicles were sold, but the expectation was 17 million car sales. Vehicle sales were flat in 2019, although we saw some spikes in March and May. The average over the year is 16.9 million.
Construction saw a bit of an increase in November. The increase of 0.6% was better than the expected 0.30% and the previous month’s 0.12%. Construction spending has stayed flat over the last year. Markets keep hoping low interest rates and rising wages will lead to consistent demand for housing, increasing construction spending.
WEEKLY INSIGHT | JANUARY 1, 2020
Equities posted strong returns for the month of December with the S&P 500 up 3.0% and emerging market equities up 7.4%. For the year, the S&P 500 gained 31.5%, which bettered small caps by roughly 6%. Foreign equities posted good gains, but lagged the U.S. market by 8-12% depending on which benchmark is used. The robust equity gains were also coupled with strong fixed income returns. The Bloomberg Barclays Aggregate Bond Index gained 8.7%, and combined with the performance out of equities, created exceptional returns in mixed allocations.
If one remembers back to the end of 2018, the key takeaway was nearly every asset class posted a negative return. Bonds managed to rally late to finish with a 0% return, but didn’t provide the necessary diversification. According to Deutsche Bank, 2018 was the worst ever, going back to 1900, regarding the percentage of asset classes posting negative returns. In 2018, 90% of asset classes posted a negative return. The final numbers aren’t out yet for 2019, but it will likely be the complete opposite with nearly all assets posting gains. Two popular asset classes, gold and high-yield bonds gained 18% and 15%, respectively.
A common message coming from the mainstream narrative is the notion of profit taking. This is not a prescription for success as long-term investment returns are built on the backbone of compounding rather than the performance in a single year. While 30% returns are not normal, one must realize this followed a year of declines. The Dow Jones Industrial Average posted a two-year price return, which excludes dividends, of 15%. Going back to 1900, the current two-year price return is surprisingly below the historical median and within 1% of the 120-year average.
Looking forward to 2020, there is an uncanny correlation between the performance of the equity market on the first two days of the year and how the entire year will transpire. This is also true regarding the month of January. Therefore, it bears close monitoring to see how equity markets start the year. Many prognosticators are calling for a near-term market top, related to tax selling getting pushed into 2020 instead of last year. Even though most sentiment gauges are very high, market participants continue to find ways to be cautious. Caution is not usually present at secular market tops and thus, 2020 may be shaping up to be another strong year for equities.
Standing left to right: Mike Kelso, Jennifer Hershey, Vicki Wismer, Paul Wannemacher, Monika Lovewell, Tracy Baughman
Seated middle row left to right: Dianne Staib, Martha Wise, Diane Kamprath
Seated front row left to right: Nicole Smith, Peggy McQuistion, Diana Wollenslegel