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.

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.

Some of the opinions, conclusions and forward-looking statements are based on an analysis of information compiled from third-party sources.  This information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. It is given for informational purposes only and is not a solicitation to buy or sell the securities mentioned. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the specific needs of an individual investor.

Stock investments involve risk, including loss of principal. High-quality stocks may be appropriate for some investment strategies. Ensure that your investment objectives, time horizon and risk tolerance are aligned with investing in stocks, as they can lose value.

There are risks associated with fixed-income investments, including credit risk, interest rate risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer term securities.

An index is a statistical composite that is not managed. It is not possible to invest directly in an index.

Definitions of individual indices mentioned in this article are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section, or through your Ameriprise financial advisor.

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 Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a widely used measure of market risk. It shows the market's expectation of 30-day volatility. The VIX is constructed using the implied volatilities of a wide range of S&P 500 index options.

Past performance is not a guarantee of future results.

Third party companies mentioned are not affiliated with Ameriprise Financial, Inc.

Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.

Ameriprise Financial Services, LLC. Member FINRA and SIPC.