Market Update: October 5th

Economic data for the week included the final GDP release for Q2, which was little changed. Manufacturing and construction continued to show general expansion trends, although month-to-month data remains mixed. Housing metrics and prices continue to show strength. The monthly employment situation report was positive, but not as strong as expected.

Global equity markets earned positive returns last week, with signs of continued economic improvement as well as ongoing hope for additional stimulus—despite resurgent and persistent Covid infection counts. U.S. bonds were mixed as rates ticked higher, while foreign bonds were helped by a weaker dollar. Commodities fell as crude oil prices continued to be challenged by difficult supply/demand dynamics.

U.S. stocks rebounded for the first time in a month. Better sentiment began Monday morning, as investors applauded the prior weekend comments from Congressional and Treasury leaders surrounding another round of fiscal stimulus. However, the amount championed by House Speaker Pelosi was down to $2 tril. from the initial $3 tril., which was taken positively, as it passed the House. This second plan continues to be worked on behind the scenes, with no concrete announcement prior to an upcoming Congressional recess. Areas of contention appear to be the balance of aid between corporate support and state/local government aid (many of the largest states in need are Democratically-controlled). While the debate earlier in the week appeared to have little market effect, reports of the President contracting Covid pared back some gains by Friday, with information flow about the timing and severity of the illness somewhat unclear.

By sector, financial, consumer discretionary, and utility stocks each gained over 3% to lead last week, while energy suffered another -3% upon weaker crude oil prices. Real estate gained 5%, as one of the week’s leading assets.

Foreign stocks fared similarly to those in the U.S., as Europe and the U.K. outperformed Japan, which ended down slightly. Europe continues to be experiencing a resurgence in Covid cases, prompting possible tighter restrictions in key cities such as Paris, Liverpool, and Madrid. Emerging markets broadly slightly beat out developed. Chinese industrial production profits in August were reported to be up 20%, in a continuation of similar results for the prior month—helping aid investor sentiment for an Asian recovery.

Broad U.S. bond indexes were little changed on net, with a rise in long-term treasury rates holding back government bonds, while corporate bonds fared better with tighter credit spreads. High yield and floating rate bank loans fared especially well for the week. In foreign markets, a weaker dollar helped developed market government bonds earn nearly a percent for the week, with emerging market debt positive, but less robust.

Commodities generally fell back last week, in keeping with declines in the energy sector, while agriculture and precious metals saw gains. The price of crude oil fell by -8% to $37/barrel, while the price of natural gas fell -13%. Since its recovery from ‘zero’ (really, about $12), the price of crude oil has recovered to a range of about $35-45. Recent dynamic continue to be driven by weak demand, yet also slowly rising global production (including additional exports from Libya). The difficulty is that, for many emerging nations, low production results in very low revenues, which exacerbates fiscal budget difficulties already strained by the pandemic. Raising production to sell more oil is the easy fix, but can have a negative effect on pricing if demand isn’t recovering at the same pace—resulting in a difficult loop.