Investors look to the future with optimism
David Joy – Chief Market Strategist, Ameriprise Financial
Weekly markets commentary — Nov. 30, 2020
With much fanfare the Dow Jones Industrial Average closed above 30,000 for the first-time last week. The S&P 500® index and the MSCI All-Country World Index set records as well. In fact, it was difficult to find any category of stocks that did not rise. Large, mid and small cap stocks all rose, as did foreign developed and emerging markets. Oil and copper also both rose, and stock and bond volatility fell. Among the major asset categories, precious metals, the dollar, long-term Treasuries, and the Chinese and Japanese currencies were among the few losers on the week. Cyclical stocks led the way higher once again. In the S&P 500, energy, financials, materials and industrials all outperformed the index, as did consumer discretionary and telecom services. Utilities, healthcare, and staples trailed behind. Depending on this Monday’s trading, stocks could be poised to deliver record returns for the month.
Bond yields rose fractionally. The yield on the ten-year note climbed two basis points to 0.84 percent. High yield spreads narrowed for the fourth straight week, leaving the option-adjusted spread of the ICE Bank of America High Yield Index at just 435 basis points, its tightest weekly close since February, and well down from its late March wide of 1,009 basis points.
Investors look beyond current conditions; The Fed makes headlines
Last week’s price action was a clear reflection of investors looking beyond the expected economic headwind of the virus in the weeks and months immediately ahead, toward an environment when a vaccine is widely available and widely adopted. This came despite economic data last week which showed current pockets of both strength and weakness. The flash manufacturing Purchasing Manager’s Index (PMI) well exceeded expectations, as did durable goods orders. New home sales and home prices were also strong. But new jobless claims rose for the second straight week, and consumer incomes and confidence were also soft, as federal support programs approach expiration. Nevertheless, the Atlanta Fed’s GDPNow model currently anticipates fourth quarter growth of 11 percent, after surging 6 percent during the week, well above the 2.2 percent forecast at the end of October.
The Federal Reserve was very much in the news last week, though not completely of its own doing. The minutes from its September meeting indicated that the Fed is prepared to provide updated guidance on it $120 billion monthly QE program as early as the December meeting. President-elect Biden announced that former Fed Chair Janet Yellen would be, if confirmed, the next Treasury Secretary. This had to come as good news for the Fed, hoping for a less politicized relationship with the White House, and coming as it did just days after current Treasury Secretary Mnuchin decided to discontinue several emergency credit programs launched in the spring, a decision to which the Fed publicly objected. This week, the Fed’s Beige book will be released, and Chairman Powell is scheduled to testify before Congress.
The November jobs report will take on added importance; FDA could approve a COVID-19 vaccine for emergency use soon
Following the consecutive rise in weekly rise in new jobless claims, this week’s November employment report will take on added importance. The Bloomberg consensus anticipates the creation of 500,000 new non-farm jobs. If so, it would be the slowest pace of job growth since the labor market began its recovery from the pandemic in May. The unemployment rate is expected to edge down to 6.8 percent from October’s 6.9 percent. In addition, the ISM PMIs are expected to confirm the strength in last week’s flash readings. China this week reported another rise in its composite PMI in November, as its economic recovery broadens.
The conduct of global trade by the Biden administration is a source of speculation, especially what to do about the tariffs imposed by the Trump administration. More immediately for the European Union (EU) is the issue of Brexit, the transition period of which expires at year-end. So far, no deal has been reached, and differences remain on the matters of fishing rights, state aid, and dispute resolution. As talks continue, it is estimated that this Friday may be the last day to reach a deal that can be ratified by year-end by EU member states and the EU parliament. The U.K. must also negotiate a trade deal with the U.S., a task complicated by the change in U.S. administration, despite the completion of five rounds of formal negotiations to date.
Lastly, the FDA meets next Thursday to consider emergency approval of Pfizer’s COVID-19 vaccine. If approved, distribution could begin almost immediately, notwithstanding the logistical challenges posed by the required storage temperatures, and the sheer size of the operation.
Sources: Factset, Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.
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A 10-year Treasury note is a debt obligation issued by the United States government that matures in 10 years. The 10-year yield is typically used as a proxy for mortgage rates, and other measures.
The flash reading of PMI is an estimate of the Manufacturing Purchasing Managers' Index (PMI) for a country, based on about 85% to 90% of the total PMI survey responses each month. Its purpose is to provide an accurate advance indication of the final PMI data.
The Purchasing Managers' Index (PMI) is an index of the prevailing direction of economic trends in the manufacturing and service sectors. The PMI is based on a monthly survey of supply chain managers across 19 industries, covering both upstream and downstream activity. The purpose of the PMI is to provide information about current and future business conditions to company decision makers, analysts, and investors.
The GDPNow forecasting model provides a "nowcast" of the official GDP estimate prior to its release by estimating GDP growth using a methodology similar to the one used by the U.S. Bureau of Economic Analysis. GDPNow is not an official forecast of the Atlanta Fed. It is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model.
The Beige Book is a qualitative report. Each of the 12 regional Federal Reserve branches conducts interviews with local business leaders, economists, bankers in their region, and other market participants The Beige Book outlines conditions of the national economy including things like the pace of local business activity as well as the employment and hiring conditions in each of the 12 different districts and details how economic factors like commodity prices, inflation, and exchange rates impact the local economy.
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