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If I Had A Million Dollars - Week of October 19, 2020

Chart of the Week: Despite concerns that increased uncertainty from COVID-19 flair-ups could weigh on consumer spending, evidence suggests that other people must be listening to my favorite live band sing: “if I had a million dollars, I’d buy you furniture for your house.” As noted in a previous piece, the pandemic caused some unprecedented crosscurrents in the economic data. The net worth of U.S. households rebounded to a record high of $119 trillion in 2Q and is almost sure to have set another record in 3Q while GDP probably grew by more than 30% annualized. There is no sign of economic pain from COVID-19 in household net worth on the aggregate, thanks to the surging stock market, rising home prices and stimulus support of income. The economic pain from the virus and the resultant lockdowns can clearly be seen in employment with only a bit more than half the jobs lost from the peak recovered so far. The September retail sales data released last week followed the V-shaped path of net worth rather than employment with spending now 4% above the February level prior to lockdowns. Peering under the surface reflects the clear impact of the pandemic though with spending at restaurants at only 85% of the level prior to lockdowns (see chart). Our U.S. Reopening Monitor continues to reflect improvement but OpenTable diners are still only at 71% of the level from the previous year though the trend continues to improve. As living space becomes more of a priority, spending in sectors like furniture, which is almost 3% above February levels, benefitted from more time spent at home and the boost to the housing market. While wholesale lockdowns seem unlikely in our opinion despite a resurgence in global infections, local lockdowns and public reaction to the infection spikes will likely weigh on growth at the margin. There is clearly a V-shaped recovery in parts of the economy, but it is still pandemic-impacted with some of the economy like restaurants, travel and services in general suffering both in terms of the sales and employment recovery.

Chart 1: Retail Sales, Net Worth & Jobs

Week in Preview


· Geopolitical: Localized lockdown measures are being re-introduced in many parts of the globe to combat the resurgence in COVID-19 infections, so the impact on economic activity will be closely monitored but revisiting wholesale lockdowns is unlikely. The final U.S. presidential debate is scheduled for Thursday. The U.S. Senate plans to pass a $500 billion relief package, but politics make it unlikely that an agreement can be reached to enact further fiscal stimulus before the election. Talks between the European Union (E.U.) and U.K. as to the details of their future trade relationship will continue to make headlines and move markets with the negotiating teams meeting in London this week.


· U.S.: September housing data via starts, permits and existing home sales should continue to reflect the strong performance of the sector. October PMI reports are expected to continue to reflect growth and improve on the manufacturing side while services hold steady despite the increase in infections. Initial jobless claims will be monitored for a high frequency look at the labor market, especially after the increase in claims reported last week. Lots of Fedspeak with Chair Powell on Monday and the Beige Book on Wednesday as highlights. Readings for our U.S. Reopening Monitor turned lower last week with new COVID-19 cases rising on a week-over-week (W/W) basis for the second week in a row. Underlying high frequency economic data was mixed with consumer sentiment and dining improving while the labor market, transit and retail sales measures took a step back. The Atlanta and New York Fed’s estimate of 3Q GDP growth are 35.2% and 13.8%, respectively. Please see our Guide to the U.S. Reopening Monitor for more details.


· S&P 500 3Q Earnings: The 3Q earnings season really gets into gear with 96 S&P 500 companies scheduled to report earnings. This will be the second busiest reporting week for the season and allow a look across all sectors. With 10% of companies reporting 86% and 82% have beaten earnings and sales estimates, respectively. 3Q blended earnings (combining actual results with estimates) improved to -18.4% from -20.4% year-over-year (Y/Y) last week according to FactSet. This improvement was primarily driven by better actual earnings from the financials even though the stocks were generally lower last week. As detailed last week, we continue to expect 3Q earnings to beat the -20.5% Y/Y estimates.



· Europe: Confirmed COVID cases have risen on a W/W basis for fifteen straight weeks in the Eurozone with more restrictions enacted in an attempt to slow the pace. France, Germany and the U.K. hit an all-time high weekly infection pace. Eurozone and U.K. PMI reports for October are expected to moderate with services particularly impacted by the massive increase in infections. The U.K. pace of infections increased for the seventh week despite tighter curbs. Please see our U.S. Reopening Monitor for additional international COVID charts and data.




The increase in cases has begun to weigh on dining in Germany.


The increase in cases and restrictions are weighing on dining in the U.K.



· Asia: China reported 3Q GDP at 4.9% Y/Y which is an improvement from 3.2% in 2Q and the COVID-impacted -6.8% in 1Q. September industrial production and retail sales in China improved to 6.9% and 3.3% Y/Y, respectively. Japan posted its third straight week of increases in the pace of infections. Japan trade data for September showed exports improving significantly to -4.9% Y/Y while imports improved to -17.2% which reflects the better global economy and Japan’s struggling domestic growth. October PMI data for Japan is likely to reflect continued economic growth struggles though the readings could improve over the September levels.



Central Banks: The central banks of Hungary, Ukraine, Israel and Russia are scheduled to meet with none expected to change their policy rate. Turkey may be forced to raise their repurchase rate to defend the lira which has fallen by about 25% versus the U.S. dollar in 2020.


Week in Review


· Stocks rose by 0.2% for the S&P 500 with only five of eleven sectors higher for the week. Industrials (1.1%), communication services (0.9%) and utilities (0.8%) outperformed the S&P 500, while real estate (-2.3%), energy (-2.1%) and financials (-0.9%) were the biggest laggards. WTI (0.7%) and Brent (0.2%) oil were higher with MLPs (-0.3%) and the energy sector (-2.1%) lower.


· Large cap value as measured by the Russell 1000 Value underperformed slightly at -0.2%. High dividend strategies underperformed the S&P 500 with the iShares Select Dividend ETF (DVY) at -0.3%. Momentum outperformed with the iShares MSCI Momentum ETF rising 0.4%. Small-cap stocks underperformed relative to the S&P 500 with the Russell 2000 lower by -0.2% and small-cap value stocks underperforming at -0.3%. The 10-year and 30-year U.S. Treasury yields were lower at 0.75% and 1.53% respectively.


· High yield credit spreads widened slightly reflecting decreased risk appetite. AAA municipal bond yields as a percentage of Treasuries rose, causing municipal bonds to underperform. The negative revenue impacts of the economic lockdown on local governments and talk of state bankruptcy have driven municipal bond valuations to low levels relative to Treasuries. Between the strong 3Q economic rebound and Federal support so far, states declaring bankruptcy remains an unlikely outcome. Additional support for the states is likely to come in any future stimulus bills, but one of the sticking points to a new deal is the size and distribution of Federal government aid.


· The U.S. dollar was stronger against both developed and emerging market currencies. Developed international stocks as measured by MSCI EAFE underperformed the S&P 500 returns in U.S. dollar terms (-1.5%) and on a hedged-currency basis (-1.0%). MSCI Japan underperformed the S&P 500 returns in U.S. dollar terms (-1.4%) and on a hedged-currency basis (-1.7%). Emerging market stocks underperformed the S&P 500 with a non-hedged return of 0.1% for MSCI EM.


· The 10-2 yield curve narrowed marginally to +60 basis points. Another curve measure of three-month yield six quarters forward minus the current three-month yield declined to +7 basis points. The yield curve has historically provided an accurate forecast of future recessions when the difference in these measures turns negative, also known as inversion. Yield curves are one of the major indicators that we monitor to judge recession risk, but these inversions typically happen more than a year in advance of an economic recession. External shocks like the current coronavirus-induced recession might not be accompanied by inversion. Stocks have historically had significant advances post-inversion.


The PDF version of Stone's Weekly Market Guide is linked here.


The Guide to the U.S. Reopening Monitor is linked here.


The weekly update to the U.S. Reopening Monitor is linked here.

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