Market Update: October 19th, 2020
Economic data for the week included strength in retail sales and consumer sentiment, regional manufacturing reports were mixed, while industrial production fell back. Producer and consumer inflation ticked up slightly, while jobless claims remain challenged.
Flattish U.S. equity markets outperformed foreign stocks, which declined last week, along with mixed political and economic news. Bonds were also mixed, with slightly positive returns domestically, coupled by weakness abroad in keeping with a rising dollar. Commodities were similarly mixed, with agriculture and energy seeing gains.
U.S. stocks moved in opposing directions last week, ending flat, as hopes for Congressional stimulus progress appeared to wane, with the Treasury Secretary reporting that a package before the election again appears less likely (although these sentiments continue to evolve). Rising Covid infections, especially in Europe, also negatively affected the mood. Better economic data and continued push to some type of eventual stimulus appeared to help markets turn the corner by late week.
Sector results were as mixed last week as has been seen in some time. Industrials, technology, and communications services all gained up to a percent, while energy and financials suffered among the largest declines of over a percent each. Real estate also fell by over -2%. In technology specifically, the positive feedback over the rollout of a new Apple iPhone model and related products has been tempered a bit by a rising anti-trust tide surrounding the largest firms, led by Missouri Sen. Hawley. Earnings for Q3 will be forthcoming during the next few weeks, and may serve to divert some attention from the political side, although the Presidential election is right around the corner as a source of potential volatility (especially the Senate races).
Foreign stocks were down across the board, hurt no doubt to some degree by a re-strengthened U.S. dollar. Shares in the U.K. fared worst, with a continued bout with worsening Covid cases and uncertainty over Brexit resolution making headlines. While it seems that Brexit should have been hammered out by now, a few remaining sticking points have gummed up negotiations, and raised expectations for possible last-minute dealing. Emerging markets also declined, but outperformed continental Europe and Japan slightly. Strength in Chinese stocks, upon continued recovery in economic data there, such as exports last week, outweighed declines in most other key nations, including Brazil, India, and Russia. China will likely end 2020 as one of the few world economies with positive GDP growth, which has already been reflected in equity prices.
It appears that the European Central Bank (ECB) will be following the U.S. Fed’s lead in adopting ‘average inflation targeting,’ in an effort to keep rates accommodative in hopes of generating some inflation. In contrast to the U.S., though, Europe’s historical experience with inflation has been much more damaging (1920s Germany), which creates an additional sensitivity to adopting too extensive of a pro-inflation framework.
U.S. bonds ticked slightly higher as interest rates fell across the yield curve. Long-term treasuries and investment-grade corporates performed similarly, while high yield and bank loans were little changed. Foreign bonds in both developed and emerging markets fell along with a stronger dollar, with emerging market local debt down nearly a percent.
Commodities were generally flat on the week as a group, with gains in agriculture (largely in wheat) and energy offset by a decline in precious metals. The price of crude oil rose by about a percent to around $41/barrel, as some signs of price strength have been cut short by rising Covid cases—weighing on perceived demand.