The Pulse – What’s happening in the Economy and the Capital Markets: 10/19 – 10/23|
Reading Time: 4 minutes
According to several data points, the economy shows continued signs of recovery at a slowing pace. The exception to the trend is residential housing where September reports were strong and leading indicators are positive.
The markets are still reflecting the potential fiscal stimulus package. Investors see this as a “when,” not “if,” and the interest rate on the ten-year U.S. Treasury bond jumped this week in anticipation of growth and a stronger 2021. Meanwhile, economists’ estimates for Q4 GDP continue to decline as the High Frequency Data reinforces the slowed pace of recovery.
Q3 earnings for publicly traded companies are exceeding expectations. However, stock prices of many of the original COVID-19 beneficiaries dropped as they have been unable to meet the elevated expectations, despite the improvements in their overall business.
The volatility of the stimulus negotiations played out in the markets. As previously discussed, investors, economists and Fed officials have all strongly expressed a need for further stimulus to sustain the economic rebound. As of late Friday, talks appear to have stalled.
We are roughly a third of the way into Q3 earnings season and company profitability is outperforming analysts’ expectations. 84% of companies exceeded expectations with average earnings 18% above expectations (compared to the long-term average of 3.5%).
Companies that immediately benefitted from COVID-19 are now struggling to meet investor expectations, while those initially negatively affected are now performing stronger.
- Netflix (NFLX) declined 8% due to their subscriber growth forecast falling short at 2.2 million.
- Kimberly-Clark (KMB) declined 11% with Q3 earnings below forecast, despite raising 2020 EPS guidance.
- Citrix Systems (CTXS), declined 11% despite the work from home infrastructure provider’s earnings exceeding expectations.
The bigger news this week was the increase in the interest rate on the ten-year U.S. government bond which serves as a benchmark for many valuation models in the markets. Since the end of September, the interest rate (aka “yield”) is up by 30%. This reflects a combination of increased optimism around 2021 economic growth and the inflationary impact of future stimulus.
The Economic News
We are expecting the first release of Q3 U.S. GDP data to be a record high in the +25-30% range. As a reminder, the reported U.S. GDP annualizes the change from the prior quarter. This report implies that we have not yet recovered from the Q1 and Q2 decline.
Looking forward, the expectations for Q4 GDP have been steadily declining since the summer. Expectations for Q4 GDP growth were as high as 9% and are now below 4%, implying that recovery will be flatter for longer, as opposed to the expected “V shape” recovery, reiterating the need for more stimulus.
ECONOMISTS ESTIMATES FOR Q4 2020 GDP – DECLINING SINCE SUMMER
LEADING ECONOMIC INDICATORS
This week, the Leading Economic Indicators through the month of September were released showing a continuation of the trends previously discussed – continued economic growth at a slowing pace. In September, the index fell below 1 for the first time since April.
The Federal Reserve’s Beige Book of Economic Activity highlighted that improvements continue across all districts with the pace of growth characterized as slight to modest.
- Manufacturing activity generally increased at a moderate pace.
- Residential housing markets show a steady demand for new and existing homes with activity constrained by low inventories.
- Banking showed an increased demand for mortgages as the key driver of overall loan demand.
- Commercial real estate conditions continued to deteriorate in many districts, excluding the warehouse and industrial space where construction and leasing activity remained steady.
High Frequency Data
High Frequency Data echoes signs of economic recovery as month over month improvements exist across almost all the data that we follow. Weekly data numbers are not as strong as the monthly improvements, highlighting the slowed pace of improvement. Weekly Retail Sales are the exception as weekly data is higher than the monthly data.
Focus of the Week – Residential Housing
Monthly residential housing statistics remained exceedingly healthy, especially year over year.
- The National Association of Home Builders index was 85 which is above expectations and September a four-decade record.
- Housing started very strong above September’s level, though slightly below expectation, having increased 11% year over year and 2% month over month
- Building permits, a leading indicator for residential housing, were better than expected and better than September, increasing 8% year over year and 5% month over month.
- Existing Home Sales were very strong, above expectations and September numbers, increasing 21% year over year and 9% month over month.
Stories that Caught My Eye
- “Shipageddon” –Trucking and shipping containers experience capacity shortage. (link)
- Paypal users will now be able to use cryptocurrencies. (link)
- Aggressive Oil & Gas M&A is reducing capacity and could lead to inflation once demand returns. (link)
- Sales of $1M+ homes have more than doubled. (link)
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