Markets overcome two significant hurdles
David Joy – Chief Market Strategist, Ameriprise Financial
Weekly markets commentary — Nov. 16, 2020
The S&P 500® index climbed to a record high last week on rising optimism that a vaccine to fight the coronavirus might soon be available. The index gained 2.2 percent, to close at 3585, eclipsing the previous record of 3580 on September 2. It was the second straight week of higher prices, after the 7.3 percent surge the previous week. The announcement from Pfizer that its vaccine may be 90 percent effective sent stocks soaring at last week’s opening bell, rising more than 3.0 percent intraday on Monday, before settling back to a gain of 1.2 percent.
Stocks sensitive to economic activity gained the most. Energy, Financials and Industrials led the way, while technology stocks actually fell slightly, as the rotation into cyclicals and away from growth continued. Industry groups battered by the virus soared, including cruise lines, airlines and hotels. The VIX index continued to decline, washing out the uncertainty surrounding the election and the vaccine. The VIX ended the week at 23, down from its weekly close of 38 just prior to the election. The dollar rose slightly, bouncing off its lowest close in two and a half years the week prior.
Bond yields rose on the rising optimism. The yield on the ten-year Treasury climbed eight basis points to 0.90 percent, although it rose as high as 0.96 percent earlier in the week. Credit spreads narrowed modestly as well.
Stocks in Europe soared even higher. The EuroStoxx 50 index climbed 7.1 percent on the week, on the back of a 6.3 percent gain on Monday. Greater sensitivity to both trade and tourism sent certain country indices even higher. Stocks in Spain climbed more than 15 percent and almost 10 percent in France.
Investors look past the election and to a future with a COVID-19 vaccine
For investors, getting past the U.S. presidential election and encouraging progress on the development of a safe and effective vaccine are two significant hurdles that increasingly appear to have been overcome. The suspense surrounding the U.S. presidential election continues to recede, as legal challenges and vote recounts appear to have little chance of success, although that process must still run its course. And, importantly, control of the Senate has yet to be determined by the runoff elections in Georgia.
And although a vaccine that is widely distributed and adopted is likely still several quarters away, significant progress is being made. In the meantime, however, both the U.S. and Europe are dealing with a virulent resurgence of the virus that is resulting in new restrictions on movement that will pressure economic activity. Until there is absolute clarity on both of these issues, especially the vaccine, stocks could be under some pressure. Nevertheless, a resolution to both of these issues is increasingly coming into focus, allowing investors to look beyond the near-term uncertainty. That prevailing sense of optimism received an additional boost by Moderna’s Monday announcement that its vaccine is 94 percent effective. That news is helping lift stocks in Europe and futures in the U.S. as the new week gets underway. Bond yields are edging higher as well.
Current economic conditions remain uncertain; labor conditions improve, but consumer sentiment slows
Just how robust the U.S. economy is at present remains uncertain. The labor market continues to heal as evidenced by the latest weekly and continuing claims data, although the gains have slowed, and low interest rates remain a support for the housing market. But consumer sentiment has apparently slowed somewhat. And with a vaccine still some months away, with a second wave of the virus hitting hard, and in the absence of additional fiscal support, forecasts of fourth quarter growth have been lowered. The New York Fed’s Nowcast model currently anticipates fourth quarter GDP growth of 2.9 percent, down from 4.8 percent at the start of October.
This week’s economic calendar will provide a good look at how much momentum the economy carried into the start of the quarter. Scheduled reports for October this week include housing starts and permits, existing home sales, and the November homebuilders index. Also scheduled are retail sales, industrial production, and leading indicators. But if the news on the development of a vaccine continues to be positive, these current monthly data points will be increasingly discounted, as the prospects for a more normal level of economic activity increasingly comes into view.
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.
1Federal Reserve Bank of New York at newyorkfed.org/research/policy/nowcast.
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