Market Update: December 7th, 2020
Photo by Erol Ahmed on Unsplash
Economic data for last week included slightly weaker ISM manufacturing and services, although the underlying metrics continued to show expansion. The employment situation report for November showed a significant slowing of job growth compared to the recovery over the past six months, due to rising Covid cases.
U.S. equity markets led the globe last week, again reaching new highs, while foreign stocks earned positive results as well. Bonds declined in the U.S. as positive sentiment and stimulus hopes led to higher long-term interest rates, while a falling dollar helped foreign bonds. Commodities were mixed with less volatility than seen in recent weeks, as crude oil again climbed higher.
U.S. stocks again reached all-time highs, with sentiment driven by U.K. Covid vaccine approvals, and plans being outlined for vaccine distribution in late 2020 and into the first half of 2021, assuming U.S. FDA approvals are forthcoming. By Friday, the market appeared to react well to the disappointing nonfarm payroll report, not due to the weakness per se, but the rising hopes for additional Congressional stimulus by the end of the year. This was signaled by both parties, although the total likely amount has now fallen below $1 trillion.
Weekly sector results were led by a sharp increase in the shares of energy companies, followed by health care, in the expectation of global demand recovery with a Covid vaccine. Declines for utilities stocks brought up the rear.
November was the best single stock performance month in decades, with the S&P up 11%. Interestingly, the S&P 500 stock index performance has broadened in recent weeks, from only a handful of mega-cap growth stocks in the lead, to over 90% of the index members trading above their 200-day moving average (a common momentum benchmark). This type of strength has tended to be a positive sign, at least as opposed to more narrow leadership.
Foreign stocks earned positive returns, but lagged those in the U.S., despite the boost from the weaker dollar. The U.K. fared best, with a return of several percent, followed by middling results in Europe and emerging markets, while Japan lost a bit of ground. Returns remained cyclical abroad, with strength in commodity-producing countries such as Brazil and Mexico, along with South Korea. Chinese stocks were mixed last week, in keeping with strengthening U.S. restrictions on Chinese investments related to their military, as well as legislation passed by the U.S. House U.S. calling for enhanced regulatory and accounting scrutiny for Chinese firms in order to retain their U.S. listing status.
U.S. bonds experienced weakness last week generally, as the same optimism for fiscal stimulus and vaccine distribution that has boosted equities, has also pushed interest rates higher on the long end of the yield curve. While both treasuries and investment-grade corporates experienced declines, high yield bonds and floating rate bank loans earned positive returns along with risky assets. A decline in the U.S. dollar of -1% helped push the return of foreign sovereign debt into positive territory, especially for emerging market local currency bonds.
The Treasury department has asked the Federal Reserve to end its credit facilities at year end, and return unused funds. While this wasn’t taken negatively, it does remove a bit of flexibility. The facilities weren’t heavily used, although the ‘forward guidance’ that a backstop was available if needed appeared far more powerful than the injection of funds physically.
Commodities were mixed for the week, with weaker prices in agriculture offset by gains for energy and metals. The price of crude oil ticked slightly higher to just over $46/barrel, with a moderate OPEC member agreement on early 2021 production designed to balance production with still-low demand. This offset a nearly -10% drop in natural gas, due to benign late fall weather conditions and high supplies on hand.
Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.