The Pulse – What’s happening in the Economy and the Capital Markets: 11/30/20 – 12/4/20|
Reading Time: 2 minutes
The capital markets experienced another strong week with further news on timing of a COVID-19 vaccine and its results on the future of the global economy. Yet, high frequency data on the consumer reversed and consumer expectations for the future are declining.
The labor market is showing mixed signals with November’s job additions coming in well below consensus alongside fewer than expected initial unemployment claims.
November was one of the strongest months for the markets in decades thanks to two sizable uncertainties largely resolving – the U.S. presidential election and the timing of a COVID-19 vaccine. The momentum continued into December with investors excited about further COVID-19 vaccine approvals expected by the end of December. Investors are also encouraged by the softening recovery and renewed expectations of a U.S. stimulus bill.
The rally remains broad-based as small cap U.S. and Emerging Market stocks continue to lead. Oil and other commodity prices are rebounding in anticipation of future demand.
For the week, the top performing sector was Energy, which increased nearly 5%. Industrials and Financials also continue their cyclically driven momentum.
- The spread from high-yield bonds to treasury bonds continues to narrow and both are now below their historical averages.
- Similarly, the market is witnessing some of the largest bond deals between lenders of private loans and companies – a sign of optimism.
The Economic News
The economic data is pointing to a clear slowdown of the economic recovery, with certain sectors healthier than others.
Anything related to online shopping is very strong following downright astonishing Black Friday results.
- As COVID-19 cases rise and consumers’ balance sheets remain in relatively good shape, we expect the holiday season to be a great one for eCommerce (larger companies with more robust technology and logistics infrastructure will perform well).
- Shopify reported an increase in Black Friday sales on its platform of 75%.
Labor news was mixed:
On the positive side, while still elevated, the Initial Jobless Claims and Continuing Claims beat expectations.
- Initial Claims were below expectations and declined after rising the prior week.
- Continuing Claims were much better than expected and dropped 500,000 people from last week.
- Nonfarm payrolls increased 245k, down >60% from October and ~50% of expectations.
- Private (i.e. ex-government hiring) payrolls increased 345k, down >60% from October.
- Unemployment rate dropped to 6.7% from 6.9%, in line with expectations.
- Underemployment was at 12.0%, still well above pre-COVID-19 levels.
The high frequency data indicates a weakening consumer.
There’s significantly more red across the tracked data than in previous weeks. While the Consumer is flashing red, steel production is flat month-over-month and down week-over-week after a significant period of growth.
- This is the first time in 24 weeks that steel production hasn’t increased month-over-month.
Source: OpenTable.com, reflects 7-day average
Focus of the Week – the Consumer
Consumer Confidence and Expectations declined in November which we saw play out in the high frequency data.
The Consumer Confidence survey asks Consumers how they feel about their current situation and what their expectations are.
- Consumer Confidence (shaded with black outline) declined 6% in November.
- Consumer Expectations (red dashed line) plummeted 11% in November.
While online retail sales are expected to be very strong during the holiday season, other components of consumer spending, notably around experiences such as restaurants and travel and in-store retail, will likely decline materially (relative to pre-COVID-19 trends).
A Few Stories that Caught My Eye
- Gas station wars – food and retail lead the way
- UPS asks major retailers to impose shipping limits
- How vaccines are made and distributed
To discuss these ideas and how they may affect your current investment strategy schedule a consultation with Simeon Wallis.
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