Top Weekly Themes
- 2020 Election. At the time of writing, there has yet to be an official call in the 2020 Presidential race. However, consensus still points to former Vice President Joe Biden being victorious in a tighter-than-expected race. The real story that differs from prior expectations of a “Blue Wave” is the chance for Republicans to maintain a majority in the Senate. If Democrats fail to capture the Senate, a divided government would be the result, an outcome the market appears to view favorably. Although gridlock lowers the chances for substantial fiscal stimulus before year-end, investors seem to believe a deal will still get done early next year. Further, without Senate control, it is likely that tax hikes, as well as a public option for Healthcare, become difficult to achieve. Market narratives shift with the wind – a week ago, the prevailing view was that a “blue wave” would drive markets higher on hopes of a large stimulus package. In one day, that narrative shifted to “gridlock is good” because things like higher taxes would be off the table. The current election cycle reinforces our previous advice to not make wholesale portfolio changes based on possible election outcomes. As we have seen over the past week, elections can be extremely difficult to predict, and market moves equally as mercurial.
- Extending an Olive Branch. After securing another term in the Senate, Majority Leader Mitch McConnell seemed to extend an olive branch to Speaker of the House, Nancy Pelosi. In a news conference last week, McConnell suggested the economy needed another rescue package, and it would be a top priority before the end of the year. His comments could help renew talks for economic support that stalled prior to the election. More fiscal stimulus would be a positive economic development as the U.S. deals with record levels of COVID-19 cases and faces challenges in the cold winter months ahead. We think that it would also likely drive the nascent shift away from large cap growth to other areas of the market.
- Treasury Yields Drop. U.S. 10-Year and 30-Year government bond yields (long end of the curve) have been trending higher since early August as expectations for a “Blue Wave,” and an increase in fiscal spending began pricing into treasuries. However, in the hours following the close of U.S. polls, and the prospects of Democrat control dimmed, the long end of the U.S. Treasury curve turned sharply lower. Both the U.S. 10-Year and 30-Year Treasury rates dropped by 11 basis points last Wednesday to 0.77% and 1.55%, respectively. The decline in yields also took interest rate sensitive areas such as Banks and Insurance lower, retracing gains achieved in the days heading into the election. On a factor-basis, there was a similar reversal post-election. Using data compiled by Strategas Research Partners, the biggest equity moves on November 4 were Value and Dividend factors down ~4.2%, respectively, and Momentum and Growth up 4.3%, respectively. As a result of low levels of Treasury yields and volatility on the long end of the curve, we continue to position fixed income portfolios, where appropriate, with an overweight to credit and maintain a shorter duration compared to the benchmark.
|Week (%)||YTD (%)||1-Year (%)||3-Year (%)||5-Year (%)||Div Yield (%)|
|Russell 1000 Value||5.5||(7.8)||(4.1)||11.5||38.5||2.54|
|Russell 1000 Growth||6.6||31.2||40.1||82.0||140.6||0.78|
|MSCI EM (Emerging Markets)||4.1||6.9||11.7||12.5||54.6||2.30*|
|Bloomberg Barclays US Aggregate||0.6||7.0||7.7||16.6||23.5||1.17|
|Bloomberg Barclays US High Yield – Corporate||2.1||3.3||5.4||15.7||38.7||4.93|
|Bloomberg Barclays Municipal Bond||0.5||3.6||4.4||13.2||20.7||1.32|
|Bloomberg Barclays Global Aggregate x US (Country)||1.5||6.9||7.7||13.6||23.9||0.71|
|Crude Oil WTI (NYM $/bbl) Continuous||7.2||(36.5)||(32.2)||(30.3)||(14.2)||38.8|
|Natural Gas (NYM $/mmbtu) Continuous||(9.7)||40.9||7.8||3.4||30.5||3.1|
|Gold NYMEX Near Term ($/ozt)||4.3||28.0||31.4||53.6||76.1||1,945.3|
|Copper Cash Official LME ($/mt)||1.6||10.4||15.6||(1.7)||34.5||6,798.0|
|1 Week Ago||YTD||1-Year Ago||3-Years Ago||5-Years Ago||Current Level|
|U.S. Dollar per Euro||1.17||1.12||1.11||1.16||1.09||1.18|
|Japanese Yen per U.S. Dollar||104.70||108.68||109.15||114.26||121.57||103.66|
|U.S. Dollar per British Pounds||1.29||1.32||1.29||1.31||1.53||1.31|
As of November 5, 2020 (close) *Dividend Yield For MSCI EAFE and MSCI EM are from 10/30/2020.
Chart of the Week
Third Quarter Earnings
- As of election night (11/3), more than 65% of companies in the S&P 500 Index had reported third quarter earnings with results better than feared. Across all sectors, almost 86% of companies reported EPS, and 78% reported sales above estimates. The more positive outcome for the quarter is likely the result of economic conditions recovering faster than first expected as well as conservatism in estimates.
- Stronger third quarter results should help buoy investor and management sentiment as the world learns to live with COVID-19 as well as make current valuations more palpable.
- Current quarter earnings don’t tell the full story, and more often, market participants focus on future earnings expectations. Like the better third quarter results, S&P 500 Index earnings estimates have also continued to improve for calendar years 2020, 2021, and 2022. While the improvement in EPS estimates has been modest, between 1% and 4%, the direction is positive and supportive of market expectations.
The Global Recovery Marches On
While much of our discussion focuses on the U.S. economy, it is important to monitor countries outside of the U.S. as our portfolios have exposure to international markets. Purchasing Managers Index (PMI) results for October show a continued improvement in countries outside the U.S. with 15 of the 18 surveys reporting above 50, indicating expansion. This is an improvement from September’s surveys, where only ten surveys were 50 or above. The steady recovery around the globe should be a positive indicator for our international holdings as well as for multinational U.S. companies.