Market Update: November 23rd, 2020
Photo by Andrea Cau on Unsplash
Economic data for the week included increases in retail sales, industrial production, and several housing metrics; a pair of regional manufacturing indexes decelerated but remained solidly in expansion.
World equity markets moved in different directions last week, with U.S. stocks declining and foreign stocks rising. Bonds fared well, as interest rates globally declined. Commodities also gained along with higher crude oil and industrial metals prices.
U.S. stocks were mixed to lower last week, as early excitement over more good Covid vaccine news was offset by sharply rising cases across the country, dampening consumer and business activity (a high profile example was the physical shutdown of New York City schools—a close reminder for Wall Street traders). By sector, returns were mixed, with energy leading the pack, up several percent, with oil prices rebounding; this was followed by materials and industrials, which continued to represent the cyclical group. Lagging with negative returns were traditional defensives utilities, health care, and real estate.
As was the case the prior week with Pfizer, positive news of Moderna’s mRNA-based Covid vaccine showed a high efficacy rate (95%) pushed stocks higher to begin the week. Additionally, it appears to be easier to store and transport (in standard refrigerator temperatures) than the Pfizer vaccine (needing far colder conditions, which create complications). The U.S. government has already pre-purchased 100 million doses, in part of an effort of world governments to ‘lock up’ access to vaccines, typically during the development process. Along with this announcement, Pfizer also adjusted their vaccine effectiveness rate upward from 90% to 95%, and applied for FDA emergency use authorization. As expected, the most positively affected stocks were those in the travel and entertainment groups.
Tesla will be added to the S&P 500 stock index, as committee members were hesitant to do for an extended period due to the company’s lack of profitability. Now that some profits have come through, S&P appears more willing to take the next step. It’s important to remember that even ‘passive’ indexes have at least one ‘active’ component—and sometimes several. Inclusion in the S&P series of indexes requires committee approval, after companies have met baseline metrics for profitability and liquidity, making this an ‘active’ decision. This is in contrast to indexes such as the Russell series, where inclusion is dependent on size alone, although original ‘style’ criteria were decided by committee members at some point.
Foreign stocks earned positive returns, bucking the weekly result in the United States—Japan and the emerging market groups led all others. Unsurprisingly, more commodity-oriented nations Brazil and Mexico led the way as hopes for 2021 improvement grew. Conditions in developed markets, such as Europe, appeared driven to a greater degree by vaccine hopes than current lockdowns—perhaps due to these occurring prior to those in the U.S. However, sentiment has been held back by the fact that a Eurozone fiscal aid package is being held up by vetoes by Poland and Hungary. In Asia, optimism followed the signing of the Regional Comprehensive Economic Partnership (RCEP) tariff-reduction trade pact, by 15 countries, from China to Australia.
U.S. bonds earned positive returns as rates ticked lower across the yield curve. Investment-grade corporates outperformed treasuries a bit, as spreads also narrowed during the week. A weaker U.S. dollar helped boost the returns for both developed and emerging market sovereign debt, earnings gains of up to a percent for the week.
Commodities broadly gained on the week in most major groups, led by increases of several percent each in industrial metals and energy, while precious metals declined slightly. Cyclical economic recovery hopes continue to remain high with the arrival of a vaccine. The price of crude oil rose by 5% to around $42.50/barrel, while natural gas declined by over -10%. OPEC and others have delayed a planned production increase in early 2021, which would have added to already high supplies.