The Pulse – What’s happening in the Economy and the Capital Markets: 11/9/20 – 11/13/20


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The Pulse – What’s happening in the Economy and the Capital Markets: 11/9/20 – 11/13/20

Executive Summary

With COVID-19 cases rising globally, the possibility of an approved and distributed vaccine before new shutdowns looms over investors’ minds and the fate of the economy. The markets reacted very strongly to Pfizer’s announcement around the success of its vaccine trials, with investors piling into some of the most out of favor industries.

Meanwhile, the labor picture is slowly improving, and economic data shows that inflation is not yet to the level that many expected after the large, global stimulus.

The Markets

Source: Bloomberg

The big story was Pfizer’s announcing progress on a vaccine for COVID-19 with markets reacting strongly globally. In the U.S., smaller companies (e.g. Russell 2000) and industries most impacted by the weak economy rallied the most, while more consistent industries such as Technology (e.g. Nasdaq) and Consumer Discretionary suffered. The top performing sectors of the S&P 500 were three of the most cyclical sectors – Energy, Financials, and Industrials. Internationally, Developed Markets performed better than the S&P 500.

A tug-of-war occurred between those focused on what earnings will be once the economy returns to “normal” activity and those concerned about rising COVID-19 cases and the impact of potential further shutdowns. We have not seen a significant decline in economic activity, yet the situation is mixed when looking across the high frequency data.

Globally, the capital markets started strong for November.

The Economic News

Source: Dallas Federal Reserve

The high frequency data shows general stasis.

The labor reports continue to improve. While still elevated (now eight months after the initial COVID-19 shutdowns), Initial Claims and Continuing Claims are improving, albeit slower than many expected.

COVID-19-impacted sectors, such as Retail Sales and Lodging, have weakened recently.

The University of Michigan’s Consumer Sentiment Survey shows increased concern over the economy:

  • Sentiment Index at 77 – down from October and well below expectations
  • Expectations Index at 71.3 – down from October and below expectations (economists anticipated flat change from October to November)

Focus of the Week – Inflation

How will low-interest rates impact inflation?

Reported government inflation data was tepid:

  • Core Consumer Price Index (CPI) – flat (below expectations and October)
    • YoY – up modest 1.6%
  • Core Producer Price Index (PPI) – up 0.2% (in line with expectations and below October)
    • YoY – up mere 0.8%

While inflation changes can be volatile month to month, looking at the three-month average highlights how inflation is trending. After acute decline and spikes related to the shutdown and subsequent government stimulus, we recently returned to levels in line with the last 5 years.

Source: US Government data

We believe it unlikely the U.S. economy will experience significant inflation if banks are not increasing their loan activity. After the spike caused by PPP and other lending programs, banks materially reduced lending activity.

Large U.S. Bank Loan and Lease Activity

Source: Bloomberg, LP

The data does not show a sustainable upward trend. After the August bounce-back, the general trend has been a decline.

Source: Bloomberg, LP
Weekly Change in Large US Bank Loan and Lease Activity

Without support from banks, inflation is unlikely. The bond markets priced in approximately 1.6% annual inflation over the next 5 years, in line with average levels. Expectations have not changed much the last several months.

5 Year Breakeven Rate – Treasury Inflation Protected Securities

A Few Stories that Caught My Eye

To discuss these ideas and how they may affect your current investment strategy schedule a consultation with Simeon Wallis.


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