Market analysis

9.28.20 | Market News

At a glance

Global equities remained in correction mode last week as the markets grappled with election and coronavirus uncertainties. The global economy continues its slow but steady improvement, led by business investment.

878,000

The four-week moving average for initial unemployment claims, still more than 200,000 higher than the peak of the financial crisis in 2009.

“On balance, the U.S. economy continues to improve, led by the manufacturing industry. However, we must remain alert to slowing momentum in the U.S. labor market, which threatens the health of the recovery.”

- Robert Haworth, CFA, Senior Investment Strategist, U.S. Bank, U.S. Bank

Term of the week

 

Pandemic Unemployment Assistance – A program temporarily expanding unemployment insurance eligibility to self-employed workers, freelancers, independent contractors and part-time workers impacted by the coronavirus pandemic in 2020

0.7%

Average decline of the S&P 500 in September over the past 20 years.

“Policy support is increasingly important to the markets and economic momentum; stimulus, school reopenings and the election remain key sources of uncertainty.”

- Robert Haworth, CFA, Senior Investment Strategist, U.S. Bank

Term of the week

 

Dot-com bubble – A rapid rise in U.S. technology stock equity valuations fueled by investments in internet-based companies during the bull market in the late 1990s. The value of equity markets grew exponentially, then in 2001 and through 2002 the bubble burst, with equities entering a bear market.

Global economy

Quick take: On balance, the U.S. economy continues to improve, led by the manufacturing industry. However, we must remain alert to slowing momentum in the U.S. labor market, which threatens the health of the recovery.

Our view: Coronavirus infection rates are rising in Europe and the United States as children return to school. We expect the United States to continue its modest pace of economic improvement, though virus growth and a softer labor market are threats. Policy support is increasingly important to economic momentum, with stimulus, school reopenings and the election remaining key sources of uncertainty.

  • The global recovery is diverging, with foreign developed economies falling behind. Preliminary September purchasing managers surveys from the U.S. and Europe showed broad improvement in September for manufacturing. However, European surveys in the services sector indicate contraction, while the U.S. continues to expand. The recent uptick in virus growth in Europe is renewing shutdowns.
  • In the U.S., orders of durable goods ― products meant to last at least three years ― increased 0.4 percent in August. That was well below the 11.7 percent increase in July. However, when automobiles, aircraft and defense goods are excluded, the numbers corroborate the improvement in the manufacturing survey, indicating business investment continues to recover.
  • The U.S. labor market recovery is stalling. Jobless claims rose slightly last week while filings for the federal Pandemic Unemployment Assistance moved lower. Claims have averaged 878,000 over the past four weeks, more than double the average since 1967 of 369,000 and well above the peak of 665,000 in 2009. The risk is that a growing share of the jobless are now permanently unemployed and the expiration of jobless benefits may hurt incomes and consumer spending.

Equity markets

Quick take: The September pullback in U.S. equities occurred from overbought conditions following a five-month surge in the historically worst-performing month of the year. Risks abound, including a Presidential election, a Supreme Court vacancy and a pandemic with no imminent vaccine solution. Favorable valuation makes cyclical sectors and companies compelling.

Our view: Benign inflation, low interest rates, ongoing monetary and fiscal stimulus policies, medical progress for COVID-19 and price trends that are at key support levels bolster our glass half-full outlook.

  • September is historically the worst-performing month; October through December are among the best. Over the past 20 years, the average return for the S&P 500 in September is -0.7 percent. Conversely, October, November and December have advanced an average of 1.3 percent, 1.5 percent and 0.7 percent, respectively. This points toward favorable performance into year-end, mindful that past performance is not a guarantee of future returns.
  • The fundamental backdrop is mostly positive for equities. Inflation and interest rates are low, yields on long-term bonds are higher than short-term bonds, and the U.S. dollar and crude oil prices are stable.
  • Information Technology has become the new defensive sector (one that consistently delivers stable and predictable earnings both in good and bad times). Technology is about change and COVID-19 has accelerated the need for 24/7 connectivity, mobility and all things internet. Cloud computing, artificial intelligence, machine learning and e-commerce are among factors fueling the race toward digitalization and the overall performance of the Information Technology sector. We see these trends continuing into 2021 and beyond.
  • E-commerce is gaining in popularity, driven by the internet’s convenience, innovation and disruptive nature. We consider best-in-class retail operators to be those with an internet presence that also promote in-store traffic and personal touch.

Bond markets

Quick take: Volatile stock markets contrasted with relatively tranquil bond markets last week. Long-term Treasuries outperformed other fixed income investments. Outflows from riskier high yield corporate bonds drove underperformance compared to municipal and investment-grade corporate bonds.

Our view: Treasury yields remain low and rangebound, which supports our preference for the extra yield found in investment-grade corporate and municipal bonds. We favor normal allocations to high yield bonds despite their higher current income, due to ongoing uncertainty and two-sided risks.

  • Multiple Federal Reserve (Fed) officials called on Congress to provide additional fiscal support. Several members, including Chairman Jerome Powell, have consistently called for more fiscal stimulus to aid the Fed’s accommodative monetary policy. Warnings from the Fed last week unsettled investors who see slim chances of new fiscal stimulus this year. The Fed plans to keep rates low and continue purchasing bonds until the economy is near maximum employment and inflation stabilizes slightly above 2 percent. This suggests Treasury yields can remain low for an extended period of time and favors the extra yield that investment-grade corporate and municipal bonds provide.
  • Higher-quality investment-grade corporate and municipal bonds outperformed riskier high yield debt. New money invested favored investment-grade bond funds over high yield funds. Nervousness regarding slowing economic data, increasing COVID-19 cases and lack of fiscal support are likely factors. We view the higher yield on riskier bonds as fair compensation for now and favor normal allocations to the category.

Real assets

Quick take: Real assets trailed the broader market last week, highlighted by declines in metals and mining stocks and the Energy sector. Copper, which hit cycle highs the previous week, fell 5 percent. Real estate investment trusts (REITs) were also poor performers, with declines in the hotel and retail sectors as fears of a second wave of COVID-19 increased.

Our view: Real asset performance called into question the strength of the economic recovery. We believe the Utilities sector, with its defensive nature and consistent dividends, should outperform in a slow- or no-growth environment.

  • REITs and Infrastructure trailed the broader market by 1.5 percent. Hotel and retail led REITs lower. Utilities were the top-performing sector within real assets, beating the S&P 500 by almost 2 percent. Dividends are being reduced by REITs but are more consistent or growing in Utilities stocks, helping that sector.
  • Domestic crude oil prices fell 2 percent, giving back some of the previous week’s gain. Domestic fundamentals continue to support prices, with inventories of crude and refined products declining. The fall in crude prices led to a considerable decline in Energy equities.
  • Metals and mining equities trailed the S&P 500 by more than 9 percent, and energy producers trailed the broader market by 8 percent. For the year, the Energy sector is down almost 50 percent and the metals/mining sector is down 20 percent, adding questions about the economic recovery.
  • Gold and copper both finished the week down 5 percent in volatile trading. However, the precious metals sector remains in a bullish trend. Last week, a rising dollar and increasing real yields improved the outlook for gold.

This information represents the opinion of U.S. Bank Wealth Management. The views are subject to change at any time based on market or other conditions and are current as of the date indicated on the materials. This is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. U.S. Bank is not affiliated or associated with any organizations mentioned.

Based on our strategic approach to creating diversified portfolios, guidelines are in place concerning the construction of portfolios and how investments should be allocated to specific asset classes based on client goals, objectives and tolerance for risk. Not all recommended asset classes will be suitable for every portfolio. Diversification and asset allocation do not guarantee returns or protect against losses.

Past performance is no guarantee of future results. All performance data, while obtained from sources deemed to be reliable, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for direct investment. The S&P 500 Index consists of 500 widely traded stocks that are considered to represent the performance of the U.S. stock market in general.

Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility. Investing in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Investment in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities. Investments in high yield bonds offer the potential for high current income and attractive total return, but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer's ability to make principal and interest payments. The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issues of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is free from federal taxes, but may be subject to the federal alternative minimum tax (AMT), state and local taxes. There are special risks associated with investments in real assets such as commodities and real estate securities. For commodities, risks may include market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates and risks related to renting properties (such as rental defaults).

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