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BMT Monday Market Insights – November 23, 2020

Market Insights

Top Weekly Themes

  1. Vaccine Monday – For the second consecutive week, prospects for a vaccine set the tone for early market trading after Moderna, Inc. announced strong results for its COVID-19 vaccine with a 94.5% efficacy rate. The positive news came one week after Pfizer and BioNTech also announced very encouraging results for their vaccines. If all goes well with the FDA approval process, both vaccines would be available for distribution prior to year-end, targeting the elderly and front-line health care workers. Obviously, this comes as welcomed news as winter weather approaches and COVID-19 cases are increasing around the globe. Although distribution won’t fully ramp up until next year, investors see some light at the end of the tunnel, looking beyond indications that U.S. economic growth is slowing. For example, the Russell 2000 Value Index (arguably the most cyclical and economically sensitive of the major indexes) is up roughly 18% this month through November 19. We expect better performance from more cyclically oriented areas of the market to be a feature of 2021.
  2. Consumer spending decelerates faster than expected – Retail sales increased 0.3% in October, its sixth consecutive monthly increase, although well below the roughly 1.3% average over the past few months. Clothing and sporting goods were the biggest drag declining 4% during the period. Concerns are growing that new lockdown measures may be necessary in order to limit the virus spread within certain parts of the country, further weighing on consumer spending. Pennsylvania, Ohio, and Illinois were a few states that have recently imposed new restrictions, while New York City’s public schools are also closing. Over the short-term, we expect consumer spending, and, ultimately, economic growth to be negatively impacted. We believe this underscores the importance of additional fiscal stimulus to bridge the gap between today and a widely distributed vaccine. We don’t believe the market expects stimulus before year-end but should negotiations stall once the new congress is sworn in, investors may become impatient. Over the long-term, we continue to have a favorable outlook considering the historic amount of accommodative easing that currently exists and our expectation that household and business confidence (and spending levels) will increase as we move through 2021.
  3. Initial jobless claims reverse course – More individuals filed for unemployment benefits than expected, indicating that job growth may be decelerating at a faster clip. The unwelcomed news comes at a time when business restrictions, school closures, and lockdowns may lead to further staff adjustments and additional downward pressure on the labor market. The unemployment rate had fallen to 6.9% in October, reflecting a substantial improvement from April’s nearly 15.0%. Given the current trajectory of COVID-19 cases and local governments’ response to control the spread, it will make it more difficult for the labor market to reflect notable improvement over the next few months, an overall detriment to economic growth in the short-term. That said, President-Elect Joe Biden recently stated he does not favor national lockdowns, so more locally-targeted restrictions may result in less severe economic consequences.

Returns Table

Week (%) YTD (%) 1-Year (%) 3-Year (%) 5-Year (%) Div Yield (%)
Equities
S&P 500 1.3 12.7 17.0 47.2 90.3 1.62
Russell 1000 Value 2.6 (2.1) 1.2 18.9 48.3 2.35
Russell 1000 Growth 0.9 30.0 35.2 80.0 140.3 0.77
Russell 2000 4.5 8.2 13.2 24.6 64.0 1.37
MSCI EAFE 1.3 2.0 5.0 12.1 35.2 2.75*
MSCI EM (Emerging Markets) 1.6 10.1 16.5 14.7 64.2 2.30*
Week YTD 1-Year 3-Year 5-Year Yield
Fixed Income
Bloomberg Barclays US Aggregate 0.4 7.1 7.3 16.9 23.6 1.18
Bloomberg Barclays US High Yield – Corporate 0.6 4.4 6.8 17.8 43.1 4.86
Bloomberg Barclays Municipal Bond 0.6 4.3 5.0 13.9 21.3 1.20
Bloomberg Barclays Global Aggregate x US (Country) 0.8 7.0 7.7 12.4 24.5 0.73
Week YTD 1-Year 3-Year 5-Year Current Level
Commodities
Crude Oil WTI (NYM $/bbl) Continuous 1.9 (31.4) (24.3) (26.1) 0.4 41.9
Natural Gas (NYM $/mmbtu) Continuous (12.1) 24.3 8.4 (12.2) 19.5 2.7
Gold NYMEX Near Term ($/ozt) (0.6) 22.5 26.3 43.6 72.6 1,861.1
Copper Cash Official LME ($/mt) 1.8 14.2 20.7 4.5 52.5 7,028.0
1 Week Ago YTD 1-Year Ago 3-Years Ago 5-Years Ago Current Level
Currencies
U.S. Dollar per Euro 1.18 1.12 1.11 1.18 1.07 1.18
Japanese Yen per U.S. Dollar 105.13 108.68 108.50 112.24 122.81 103.90
U.S. Dollar per British Pounds 1.31 1.32 1.29 1.32 1.53 1.32

As of November 19, 2020 (close) *Dividend Yield For MSCI EAFE and MSCI EM are from 10/30/2020.

Chart of the Week

Bloomberg Barclays U.S. Agg ABS Average OAS
(November 18, 2019 – November 18, 2020)

Click a chart to enlarge it.

Bloomberg Barclays U.S. Agg ABS Average OAS (November 18, 2019 – November 18, 2020)
Source: Bloomberg, Inc.

Key Takeaways

  • In March, to control borrowing costs that were increasing across all corners of the lending markets, including commercial paper, asset-backed securities, and corporate and municipal bonds, the Fed looked beyond its monetary policy tools to provide necessary stability to the financial markets.
  • The Fed referred to section 13(3) of the Federal Reserve Act that gives the Fed more leeway to implement programs/facilities to provide market liquidity that stretches beyond depository institutions. With approval from the Secretary of the Treasury, the Fed initiated a number of facilities, including the Term Asset-Backed Securities Loan facility, the Primary and Secondary Credit Facility, and the Municipal Bond Liquidity Facility, all of which enabled the Fed when appropriate to step in as a lender of last resort.
  • These programs/facilities were very successful, and borrowing costs have steadily declined to today’s much more benign levels. With most of these programs/facilities expected to end at the end of the year, many question whether an extension should be granted until later next year.
  • Interestingly, Treasury Secretary Steven Mnuchin and the Fed have different opinions. In a letter sent by the Treasurer Secretary to the Federal Reserve Chairman Jerome Powell last Thursday, he said that most of these emergency facilities would expire on time at the end of the year. The letter received a quick response from the Fed, noting the importance and benefits of the facilities remaining open into 2021 and the preference to do so.
  • There’s little argument that these programs were very influential in restoring financial market stability. Based on current funding costs, we would agree that these programs have successfully served their intended purpose. However, with wide vaccine availability not expected until next year and uncertainty around future fiscal stimulus, we would advocate for keeping the facilities open as a backstop into 2021 in light of the rising jump in COVID-19 cases around the globe.

COMMENTARY

U.S. Existing Home Sales Median Price YoY Percent Change (December 31, 2000 – October 31, 2020)

U.S. Existing Home Sales Median Price YoY Percent Change (December 31, 2000 – October 31, 2020)
Source: Bloomberg, Inc.
  • The housing sector continues to be a bright spot for the U.S. economy as low mortgage rates and demand for housing in the suburbs add a boost to home purchase activity. Existing home sales increased to a nearly 15-year high in October rising at an annualized rate of 6.85 million. Home prices continue to rise and have yet to deter home demand.
  • Housing starts recorded earlier in the week last week have also been robust but not enough to offset the dwindling supply of homes. In fact, based on the current pace of sales, it would take a record low 2.5 months before depleting the number of residential units available. Based on that statistic, it is probably not too surprising that the National Association of Home Builders Market Index is at record levels, indicating a high level of homebuilder sentiment.
  • We believe the housing sector will remain healthy as we turn the corner to 2021, given our expectations that mortgage rates will remain low, coinciding with an accommodative monetary policy environment. The vaccines will hopefully allow for households and businesses to revert to pre-pandemic behavior, although some degree of change is inevitable. Individuals have learned to work from home, with some expected to remain doing so after the pandemic. The housing market has certainly benefitted from this shift as households have looked for more space in the suburban areas. We believe this trend will likely continue in 2021, a positive for housing market activity and the housing sector overall.

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