Top Weekly Themes
- Consumers not very Confident – Last Tuesday morning, the Conference Board announced that its Consumer Confidence Index® had plunged to 84.8 for the month of August 2020, vs. July’s 91.7. The consensus estimates called for a reading of 93.0. With this sharp decline, the Index ticked below the levels seen during the depths of the economic lockdown back in April and May. The Index is comprised of two components, one that asks consumers to assess current conditions and a second that speaks to expectations six months hence. Of note, the present conditions component saw a much sharper decline than did the forward-looking portion of the survey. One dynamic that surely played a part in the weaker confidence levels was the expiration of enhanced unemployment benefits on July 31. While Washington is locked in a stalemate with respect to the size and scope of the next stimulus package, consumers – the engine of the economy – are clearly feeling ill at ease.
- New Home Sales Surge – While consumers as a whole may be expressing flagging confidence levels, given the extremely low mortgage rates, a large number of individuals were nonetheless more than willing to purchase a new home. The same day the confidence figure was published, it was announced that new home sales for July surged to 901,000, vs. the consensus estimate of 782,000. While this is still well below the levels seen just before the onset of the Great Recession, it is easily the highest monthly figure over the past ten years. The housing supply chain has been greatly impacted by the recent pace of housing, particularly the price of lumber. The Random Length Lumber Contract, which started the year around $400, was recently trading for roughly $880, an increase of 120%.
- Turnover in the Dow Jones Industrials Index – Last week, an announcement was made that the Dow Jones Industrial Average (DJIA) would be experiencing its most significant makeover since 2013. Specifically, three companies (Exxon Mobil, Pfizer, and Raytheon Technologies) would be removed and replaced by Amgen, Honeywell, and Salesforce.com. The changes were at least partially prompted by Apple’s decision to split its stock four-for-one. Unlike most indices, the DJIA weights each of its component companies based on that company’s stock price, as opposed to the more typical approach where stocks are weighted by market capitalization. As such, when Apple announced they would be splitting their stock four-for-one, this effectively translated to a vast decline in not only Apple’s weight within the Index, but also the Index’s exposure to the tech sector. The addition of Salesforce.com will offset some of the decline in the tech weighting. With shares of ExxonMobil and Pfizer both trading for around $40, they had declined to tiny weights within the Index and are being replaced with higher-priced stocks. Of note, Exxon Mobil had been the most tenured member of the Index, with its predecessor (Standard Oil) having joined the Dow in 1928.
|Week (%)||YTD (%)||1-Year (%)||3-Year (%)||5-Year (%)||Div Yield (%)|
|Russell 1000 Value||1.9||(9.3)||3.3||14.7||43.4||2.60|
|Russell 1000 Growth||3.8||28.9||45.0||93.1||150.1||0.77|
|MSCI EM (Emerging Markets)||3.4||2.1||19.0||11.9||57.5||2.36*|
|Bloomberg Barclays US Aggregate||(0.5)||6.5||6.2||16.0||23.0||1.20|
|Bloomberg Barclays US High Yield – Corporate||0.7||1.5||4.8||15.6||36.9||5.39|
|Bloomberg Barclays Municipal Bond||(0.3)||3.3||3.3||13.0||21.7||1.30|
|Bloomberg Barclays Global Aggregate x US (Country)||(0.6)||4.4||3.4||8.7||20.0||0.79|
|Crude Oil WTI (NYM $/bbl) Continuous||0.5||(29.5)||(21.6)||(10.1)||1.1||43.0|
|Natural Gas (NYM $/mmbtu) Continuous||15.2||23.8||23.6||(7.3)||1.7||2.7|
|Gold NYMEX Near Term ($/ozt)||(0.6)||26.5||24.7||48.7||71.2||1,921.6|
|Copper Cash Official LME ($/mt)||0.1||7.3||16.6||(1.7)||31.3||6,602.5|
|1 Week Ago||YTD||1-Year Ago||3-Years Ago||5-Years Ago||Current Level|
|U.S. Dollar per Euro||1.18||1.12||1.11||1.19||1.12||1.18|
|Japanese Yen per U.S. Dollar||105.95||108.68||105.92||109.26||120.70||106.45|
|U.S. Dollar per British Pounds||1.31||1.32||1.23||1.29||1.54||1.32|
As of August 20, 2020 (close) *Dividend Yield For MSCI EAFE and MSCI EM are from 7/31/2020.
Chart of the Week
Personal Consumptions Expenditures, excluding Food and Energy
Year-over-Year Change for the Trailing 20 years
- The Federal Open Market Committee (FOMC) has two goals, known collectively as the “dual mandate.” Those goals are price stability and maximum sustainable employment.
- Before Thursday, the FOMC had indicated that, with respect to employment, the Committee most recently estimated a normal long-run rate of unemployment of 4.1%. As to inflation, the Committee has judged that a rate of 2%, as measured by the Price change of the Personal Consumption Expenditures (PCE), is consistent with its statutory mandate. The statement from the FOMC also notes that “The Committee would be concerned if inflation were running persistently above or below this objective.”
- The chart above shows the year-over-year change in the PCE for the past 20 years. Looking just at the past decade, while the 2% level of inflation has been attained for two very short time periods, this inflation indicator has rather consistently tracked below that level. Earlier this year, the Fed said they would do whatever it takes to support the economy during the current recession, which has translated to a myriad of support programs.
- With unemployment levels still above 10%, initial weekly jobless claims running over one million, and the PCE now below 1%, Chairman Powell spoke at Jackson Hole, Wyoming, last Thursday morning. Powell announced that the FOMC had unanimously approved updates to its goals, whereby it now “seeks to achieve inflation that averages 2 percent over time.” Consequently, “following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time.”
- This move indicates that, unlike the past, the Fed will not preemptively raise rates to address anticipated inflation, but will instead wait until inflation runs above 2% for some time before acting. Given the trend in the PCE over the last ten years, it also reinforces our belief that short-term interest rates are likely to remain near zero for a very long time.
 The Federal Reserve’s Dual Mandate, Federal Reserve Bank of Chicago, updated as August 10, 2020.
The Predictive Power of the S&P 500 Index
It is often said that the stock market is forward-looking, discounting future events before they occur. With respect to presidential elections and the fortunes of the incumbent, that has certainly been the case over the recent past.
Specifically, if the performance of the S&P 500 Index over the three months just before the election is positive, the incumbent has been reelected in every election since 1984. Looking longer-term, this simple calculation has correctly predicted the outcome 87% of the time since 1928.
The chart above segments the average performance of the S&P 500 in the election years since 1936 into two buckets, those years where the incumbent won, and the years that party lost. The 2020 year-to-date return is also shown.
While the paths to get there are clearly a bit different, the two blue-shaded lines nearly meet in August when the 90-day clock starts. For 2020, the 90-day time period started on August 3 and, thus far, the early results would appear favorable for President Trump, with the S&P up roughly 5.9% through last Thursday’s close.
However, using the past 80 years as a sample, a more granular analysis shows that the real fork in the road has occurred around September 5. From that time period until the date of the election, the disparity between the two election outcome lines clearly widen. This critical time period will begin next week. Thus, using history as a guide, the performance of the Index from September 5 until the election is likely to foreshadow whether or not this incumbent is rewarded with a second term.
Best Wishes to all for an enjoyable, and safe, upcoming Labor Day weekend.