Top Weekly Themes
- Choppy Economic Seas. Aside from strong momentum in housing, U.S. economic indicators remain positive, but momentum is slowing. The University of Michigan consumer sentiment data for September was better than expected, but it still showed little improvement relative to June. While consumer outlooks are improving, sentiment remains depressed, still down over 15% year-over-year and far below February’s peak reading. Economic activity as measured by the Markit Purchasing Managers Index (PMI) remains in expansion, but the pace is slowing. The U.S. September Manufacturing PMI rose 0.40 month-over-month to 53.5, which is encouraging. However, Services PMI fell by a similar amount month-over-month to 54.6, highlighting the continuing struggle for services in a COVID world. More evidence of a deceleration could be seen in last week’s jobless claims, as Initial and Continuing Claims were weaker than expected. Initial Claims remain stubbornly high at 870,000 for the week ending 9/19, while Continuing Claims declined slightly, but remain over 12.5 million. As we enter colder months in the northern hemisphere, with no coronavirus vaccine and no definitive second stimulus package, we could see more indications of a sputtering economy.
- Additional COVID-19 relief package less likely?With choppy economic seas, it seems increasingly important for another round of coronavirus aid, but stimulus hopes look to be sinking, at least over the near-term. The recent passing of Supreme Court Justice, Ruth Bader Ginsburg, has left a vacancy in America’s highest court. The selection of a new supreme court justice will likely garner the attention of the Trump Administration and Congress before the November election. Declining probability of additional coronavirus aid is not great news for the U.S. economy, which has turned wavy following a V-rebound. All hopes are not lost as lawmakers are moving closer to a short-term government funding bill, reducing further potential chaos heading into the November election.
- The Future, it’s Electric. The Governor of California, Gavin Newsom, signed an executive order last week that all new passenger vehicles sold must be zero-emission by 2035. The order does not impact the sale of used cars, but if there was any question about the direction automakers need to go, it is now clear. California has historically been the leading state on emissions rules since it put its own standards in place during the 1970s. While the goalpost can certainly move during a fifteen-year time horizon, this executive order could negatively impact the already beleaguered energy industry. The future regulatory backdrop is a further blow to an industry already dealing with oversupply issues and is why we remain less optimistic about upstream exploration & production (E&P) and prefer to hold exposure in more diversified integrated companies.
|Equities||Week (%)||YTD (%)||1-Year (%)||3-Year (%)||5-Year (%)||Div Yield (%)|
|Russell 1000 Value||(4.7)||(14.0)||(7.4)||5.9||40.6||2.73|
|Russell 1000 Growth||(1.8)||19.0||32.0||73.5||135.3||0.83|
|MSCI EM (Emerging Markets)||(4.4)||(3.2)||7.3||4.2||54.2||2.28*|
|Bloomberg Barclays US Aggregate||(0.1)||6.9||6.9||16.6||23.0||1.18|
|Bloomberg Barclays US High Yield – Corporate||(1.5)||(0.0)||2.3||12.8||36.1||5.98|
|Bloomberg Barclays Municipal Bond||0.0||3.4||4.1||13.1||21.1||1.31|
|Bloomberg Barclays Global Aggregate x US (Country)||(1.2)||4.3||4.2||8.8||18.8||0.75|
|Crude Oil WTI (NYM $/bbl) Continuous||(1.6)||(34.0)||(29.6)||(20.4)||(10.2)||40.3|
|Natural Gas (NYM $/mmbtu) Continuous||42.0||32.4||14.8||(2.0)||11.9||2.9|
|Gold NYMEX Near Term ($/ozt)||(3.7)||23.0||21.9||44.5||61.9||1,868.3|
|Copper Cash Official LME ($/mt)||(3.3)||6.2||13.5||2.1||29.6||6,538.5|
|Currencies||1 Week Ago||YTD||1-Year Ago||3-Years Ago||5-Years Ago||Current Level|
|U.S. Dollar per Euro||1.18||1.12||1.10||1.20||1.13||1.16|
|Japanese Yen per U.S. Dollar||104.72||108.68||107.42||111.94||119.31||105.48|
|U.S. Dollar per British Pounds||1.29||1.32||1.25||1.35||1.53||1.27|
Charts of the Week
Record U.S. Household Net Worth, Real or Mirage?
- The chart and graph referenced to the left, show the rise in U.S. household net worth and U.S. government debt over the past twenty years. According to second quarter data released by the Federal Reserve last week, U.S. household net worth rose to almost $119 trillion, surpassing the prior peaked set in the fourth quarter of 2019.
- Despite a significant rise in equity values since March, growth year-to-date (YTD) in household assets has not been driven by the rebound in stocks, but instead by the continued strength of the housing market. It is true that the swift recovery in equity markets contributed to the rebound quarter-over-quarter, but financial assets remain a $480 billion drag year-to-date. The table depicts the strength of the U.S. housing market during this downturn, supporting the robust home sale and price data we have witnessed in recent months.
- The growth in household net worth has been positively impacted by the rise in U.S. government debt, which ascended rapidly following the coronavirus outbreak. This government intervention has enabled a rapid snapback of household assets compared to the several years it took to recover following the 2008 financial crisis.
- In general, we believe that the rise in asset values will help bolster consumer confidence, and the elevated level of government spending isn’t destined to lead to a reduction in household net worth.
Elections Don’t Matter for Markets…
With the 2020 election rapidly approaching, it’s tempting to make modification to one’s portfolio, especially given the abundance of market predictions by the financial media. To have a chance at generating alpha, an investor must correctly predict the victorious candidates, mix of Congress, achievable legislative goals, and quantifiable impacts from those goals. Lastly, even if one could correctly forecast those variables, one must determine how much of this outcome is already priced into markets. Quite a tall order to meet, but maybe the reward is worth the risk? We don’t think so. Election year price returns for the S&P 500 between 1929 and 2019 produce very similar average returns when compared to years directly following an election. So, although it may seem that elections would be obvious catalysts for a turning point in market cycles, the data does not support that conclusion. Further, predicting winners and losers can be equally as difficult, even if one knew the election outcome beforehand. For example, financial and energy stocks were assumed to be major winners if Trump won the election in 2016. We now know that these two sectors have in fact been the worst performing S&P 500 sectors during Trump’s first term. As we discussed at the start of the year in our Bryn Mawr Trust 2020 Economic & Investment Outlook, it is generally not advisable to change your long-term goals and objectives on the expected binary outcome of the U.S. election.