Conway’s QuickTake: Week of December 21, 2020
|Here’s What Happened Last Week: |
U.S. Equities and Economic Data/News
Major indices touched new high levels last week as ongoing negotiations continued amongst Congressional leaders to pass another economic relief package. In addition, encouraging developments related to both the Pfizer-BioNTech and Moderna vaccine candidates boosted overall investor sentiment. The S&P 500 sectors were led by technology stocks while energy lagged significantly, falling more than 4%, even though reports indicated strong demand for oil out of China and India. Tesla, set to join the S&P 500 Index on Monday the 21st, paved the way for several mutual funds and ETFs to adjust their composition to accurately track the index on Monday. With a market-cap near $650 billion, it will instantly become the sixth largest company in the index once added. That also means material costs were realized to make room for the new auto manufacturing behemoth. Represented by their respective Russell indices, small-cap stocks bested their large-cap counterparts and continued a streak of several weeks of outperformance. Amazingly the YTD performance gap between small- and large-cap stocks has vanished because of this. Growth dominated value for the week, while the YTD performance delta between these styles persists.
After several months of back-and-forth negotiations between both political parties, signs indicate a new package is imminent. The new deal amounts to about $900 billion and includes $600 direct payments to individuals and a separate $300 per week unemployment stipend. After a brief speedbump to limit the Federal Reserve’s lending ability during the pandemic was resolved, the Senate and House of Representatives are expected to vote on Monday. In vaccine news, December 14th marked the rollout of the Pfizer-BioNTech vaccine in the U.S. to frontline workers. Then on late Friday, the FDA authorized the Moderna vaccine for emergency use in the U.S., which essentially doubled the domestic vaccine quantity available for distribution by year-end. These positive events face an uphill battle as cases in the U.S. continue to rise, with populous southern California reporting the highest number of concentrated cases despite the enforcement of lockdowns and strict mask-wearing compliance in public. Initial weekly jobless claims through December 12th also unexpectedly rose for the second straight week to 885,000, the highest level since early September. However, continuing claims fell to about 5.5 million Americans through December 5th which is evidence the employment market is still fighting to recover to its pre-pandemic levels.
International Equities and Economic Data/News
Most international developed countries advanced indicative of the 2% rise of the MSCI EAFE Index. In fact, both European and Japanese equities were supported by three factors: vaccine optimism, impressive PMI data in critical economies, and positive stimulus package progress in the U.S. Emerging markets were positive but less so compared to developed markets. The largest component of the index, Chinese equities, rose despite the U.S. announcement it is steering clear from the nation’s top chipmaker (Semiconductor Manufacturing Int’l Corp.) for security reasons.
As Europe deals with continuing concerns of a no-deal Brexit, it also must manage conflicting COVID-19 situations. After French President Emmanuel Macron contracted the disease and began his quarantine, other world leaders he previously met with also isolated to be safe. Germany, the U.K., and the Netherlands all announced new strict lockdown measures over the coming weeks. Italy is considering imposing additional restrictions over Christmas to curtail anymore infections. Japan lowered its GDP growth forecast for the year through March 2021 to a 5% contraction from its previous 4.5% contraction considering new COVID-19 cases and expected economic restrictions. The healthcare system’s capacity is being tested with hospital beds and ICUs filling up with people in dire need. The country has contracted with Pfizer for half of its population to be vaccinated. Even though the U.S. recently highlighted Chinese powerhouse SMIC (see above) as being a threat to national security, demand for Chinese assets has remained strong. Data released last week hinted that November industrial output, fixed asset investment, and retail sales grew significantly from one-year ago.
The yield on the 10-year is trading around 0.92%, staying in the upper bound of the 0.88%-0.95% weekly range. The Fed’s statement from Wednesday’s FOMC meeting highlighted that asset purchases will continue until “substantial” progress is made. Overall, the Fed remains cautious on the near-term outlook, holding the target benchmark unchanged at 0.25% to keep interest rates low. The corporate spread for the iShares iBoxx Investment Grade Corporate Bond ETF, LQD, was approximately -7 bps tighter this week. Month-to-date corporate bonds have once more outperformed government sectors. The U.S. credit index is down 9 bps in December compared to government bonds at -0.42% month-to-date. For the municipal bond market, it was a quiet primary issuance week although trading picked up this week. Institutional investors offered $3.7 billion to the secondary market from “bid wanted” lists. That was up over 20% from last week. Municipal fund inflows continued with $915mm for the week ending 12/16.
Monday, December 21, 2020
•Euro area Consumer Confidence Flash
Tuesday, December 22, 2020
•US GDP Growth (Q3)
•US Existing Home Sales
Wednesday, December 23, 2020
•US Personal Spending
•US Initial Jobless Claims
Sources: The WSJ, T. Rowe Price Global Markets Weekly Update, Trading Economics
Data in this report is obtained from sources which we believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. It is provided for your information and guidance and is not intended as specific advice and doesn’t not constitute an offer to sell securities. Consult your financial professional before making any investment decision. Past performance is no guarantee of future results. Diversification/asset allocation does not ensure a profit or guarantee against a loss. The Wilshire 5000 Total Market Index measures the performance of all U.S.-headquartered equity securities with readily available price data. The Standard & Poor’s 500 Index (S&P 500) is an unmanaged group of securities considered to be representative of the stock market. The Russell 2000 Index is a market-cap weighted index comprised of the smallest 2,000 companies within the Russell 3000 Index, a larger market-cap index made up of the largest 3,000 publicly traded companies in the U.S., nearly 98% of the investable U.S. stock market. The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI Europe Index captures large- and mid-cap representation across 15 Developed Markets countries in Europe, covering approximately 85% of the free float-adjusted market capitalization across the European Developed Markets equity universe. The MSCI Emerging Markets (EM) Index captures large- and mid-cap representation across 26 Emerging Markets countries, covering approximately 85% of the free float-adjusted market capitalization in each country. The MSCI Japan Index captures large- and mid-cap representation of the Japanese market, covering approximately 85% of the free float-adjusted market capitalization in Japan. The Bloomberg Barclays U.S. Aggregate Bond Index is a market capitalization-weighted index comprising Treasury securities, Government agency bonds, mortgage backed bonds, corporate bonds, and some foreign bonds traded in the U.S. The Bloomberg Barclays Global Aggregate Ex U.S. Index measures the performance of global investment grade fixed-rate debt markets that excludes USD-denominated securities. The Bloomberg Barclays Municipal Bond Index covers the U.S. dollar-denominated long-term tax-exempt bond market. Created by the Chicago Board Options Exchange (CBOE), the Volatility Index, or VIX, is a real-time market index that represents the market’s expectation of 30-day forward-looking volatility. Data in this newsletter is obtained from sources which we, and our suppliers believe to be reliable, but we do not warrant or guarantee the timelines or accuracy of this information. Consult your financial professional before making any investment decision. Past performance is no guarantee of future results. Diversification/asset allocation does not ensure a profit or guarantee against a loss.