highlights
- The S&P 500 notched its third best weekly performance of the year and it’s best since early April. The move came after the index suffered its largest weekly pullback since March the week prior.
- Numerous themes remained in play, most of which remain unchanged from prior weeks, the largest being the U.S. election results.
- Growth outperformed value and the FANG+ index posted its best week since early June.
- Tech was the best performing sector buoyed by Apple & Semi- conductor names, while Healthcare was the second best performing, due to Managed Care names.
- Investors appear to like the idea of a split government, which is the most likely scenario in the Senate. This will not be confirmed until January once Georgia’s runoffs are completed.
- As earnings season winds down, nearly 90% of the S&P 500 has reported, with more than 85% of companies beating expectations.
- Economic data remained a tailwind throughout the week with Non-farm Payrolls, the unemployment rate, and ISM Manufacturing coming in better than expected.
- Equities were in a full risk-on mode Monday with global markets rallying after data from Pfizer’s late stage vaccine candidate was released.
- Some of the largest year-to-date winners were amongst the largest decliners on the day.
- Despite the uncalled states and lawsuits challenging the results of the presidential election, the VIX fell from a peak of ~40 in the days leading up to election day down to ~25, signaling that the worst fears around a contested election have passed.
LAST WEEK
Investors remained in a risk-on mode throughout the week as the S&P 500 notched its third best weekly performance of the year and its best since early April. The move came after the index suffered its largest weekly pullback since late March. The S&P recouped all of its losses from the week prior, closing up 7.32% over the five days. The NASDAQ rose 9.01%, followed by the Dow Jones and the Russell 2K, both of which ended 6.87% higher. There were numerous themes in play, most of which remained unchanged from prior weeks, which included:
- U.S. Presidential election
- Vaccine Optimism
- Continued easy monetary policy
- Continuation of a better-than-expected earnings season (NFP, ISM Manufacturing & Unemployment Rate)
- Economic data releases
SECTOR PERFORMANCE
Growth outperformed Value, gaining 7.41% while value rallied 5.22%. The FANG+ index posted its best week since early June, rising 8.36%. From a sector, standpoint all 11 sectors finished higher reversing the trend from the week prior, which saw all 11 sectors decline.
Tech rallied 9.7%, boosted by Apple, which gained 9.0% and Semi-conductor names as the Philadelphia Semi-conductor index increased by 12.67%.
Healthcare was the next best performing sector as Managed Care names gained on expectations that a Republican controlled Senate could limit some of the most harmful healthcare policies under a Biden administration.
Communication Services were pushed higher again by the larger “techier” names such as Facebook (+11.5%), Netflix (+8.2%), and Google (+8.9%.
Consumer Discretionary were largely in line but outperformed slightly, with homebuilders and Amazon (+9.1%) leading the way higher, offsetting weakness in cruise lines and apparel-related names.
Industrials followed Consumer Discretionary and finished largely in-line with broader markets as Aerospace and Defense names saw strength, which helped buoy the group after infrastructure-related names underperformed on the lack of a Blue Wave.
Energy was the worst performing sector despite WTI rallying 3.8%. E&Ps were lower on the week, hit by fears of a Biden administration potentially limiting fracking on federal lands.
Other Assets such as Treasuries were stronger as the curve flattened. The Dollar index posted its worst week since March, while gold gained 3.9% having its best weekly performance since late July.
U.S. PRESIDENTIAL ELECTION
While it was a busy week with multiple narratives for investors to digest, none were bigger than the U.S. election results; and despite the US presidential election being “called” by various media outlets, states have yet to certify their ballots, meaning that the final results are not official. However, it is widely expected that VP Joe Biden will become the next president of the United States barring an unforeseen circumstance. The Blue Wave that was anticipated did not come to fruition as President Trump and Republicans outperformed expectations set by Pollsters, shining a light on the reliability of various election polls.
German Chancellor Merkel implemented the toughest restrictions seen since a national lockdown in the spring. The month-long partial lockdown went into effect on Monday, November 2nd with the hope of stymieing the rapid spread of COVID-19 throughout the country. The plan calls for restaurants, bars, nightclubs, gyms, theaters, and concert venues to be closed. Citizens are only permitted outside with members of their own household and will be limited to 10 people. Schools, daycares, supermarkets, and hair salons are able to continue operating under current regulations.
As of publication date, it appears that Republicans will maintain control of the Senate, causing a divided government and dealing with a potential blow to some of the Biden administration’s biggest agendas, including tax hikes, generous subsidies for alternative energy, and the potential to pack the court. The current landscape as of this writing is 48-48, however, Alaskan Republican candidate Dan Sullivan is expected to win (as he currently leads 64% to 32%), and North Carolina Republican Thom Tillis leads by more than 95K votes. The final two seats of the Senate will not be known until early January after a runoff occurs in Georgia. Republican candidate David Perdue was leading 49.7% to 47.9%, with 98% of the ballots counted, however, failed to secure the necessary 50% needed to win, while Republican Kelly Loeffler trailed Democratic candidate Raphael Warnock, however both were well below the 50% needed. It is worth noting that the third place candidate was part of the Republican Party and had 20% of the votes.
Despite the uncalled states and the continuing lawsuits challenging the results, we saw the bullish narrative shift from the potential for larger stimulus and government spending, to a divided government ultimately benefiting the market. Investors appeared to like the outcome with a big risk-on move with most asset classes rallying even with the “uncalled election”.
With a gridlocked Congress, many strategists believe this may be the best-case scenario as global markets will benefit from pro-business policies under the Trump administration, paired with the pro- globalization policies of the Biden administration. According to Factset, equities have historically posted slightly stronger gains in a divided government, with an average annual gain of 12.5% in a split Congress versus 11.8% during a Blue Wave and 7.8% with a Red Wave.
EARNINGS SEASON UPDATE & ECONOMIC DATA
As earnings season winds down, nearly 90% of the S&P 500 has reported with more than 85% of companies beating expectations. According to Factset, “in aggregate companies are reporting earnings that are 19.5% above estimates, which would be the second- biggest earnings surprise” since they began tracking the data in 2008.
Economic data remained upbeat throughout the week as Non-farm payrolls, Unemployment rates, and ISM Manufacturing all came in better than forecasted. ISM Manufacturing climbed to its highest levels in more than two years, posting a headline number of 59.3 versus estimates of 56. Non-farm payrolls added 638K jobs in October, while the unemployment rate fell to 6.9% from 7.6%. Although continuing claims did not beat estimates, they continued their trend lower, falling to 7.28M from 7.75M the week prior.
COVID-19 UPDATE
Although the U.S. election diverted nearly everyone’s attention from COVID-19, cases continued to skyrocket in the U.S. hitting 122K new cases on Thursday, becoming the third time throughout the week that a new record was set. Hospitalizations rose above 53K, their highest levels in more than three months with Midwestern states being amongst the hardest hit. Even as U.S. cases have risen, there have been no new broad-based measures to curb the spread such as what we have seen in Germany, France, The UK, Spain, Greece, and other European countries.
THIS WEEK
Equities were in full risk-on mode as global markets rallied in Monday’s session with the Dow adding 2.95% followed by the S&P 500, which closed higher by 1.17% as 73% of members in the S&P advanced. The S&P 500, Dow Jones, NASDAQ Composite and Dow Transports all touched record intra-day highs to start the week, however finished off their best levels. Names pegged to the re-opening of the economy led markets higher after the first successful data from Pfizer’s late stage vaccine candidate was released. The company announced that patients who took two doses three weeks apart, experienced 90% fewer cases than those who were placed in the placebo group. The trial results raised hopes that economies could recover quicker than anticipated after a year ravished by the COVID-19 global pandemic. Infectious disease expert Anthony Fauci said the drug will have a “major impact” on how authorities cope with the pandemic, adding that the results are “just extraordinary”.
Some of the biggest year-to-date winners who have benefited from the stay-at-home narrative were amongst the largest decliners on the day. Video gamers, online retailers, streaming services, and vaccine companies all declined, dragging the NASDAQ lower. Value outperformed growth in a meaningful way as value gained 4.15%, while growth declined .62%. Energy was the best performing sector on the day followed by other “out of favor sectors” such as Financials, Industrials, Real Estate, and Materials.
Oil surged on the news, gaining 8.5%, which was the most since May while Treasuries sold off as yields gained. Gold posted its largest daily decline, closing down about 5% on the positive news as investors took off hedges and rotated out of safe haven plays.
THIS WEEK INTERNATIONAL
Last week, global equities surged 7.58% and wiped the previous week’s 5% decline. Information technology led the MSCI ACWI index with 9.41% gains, followed by health care. The energy sector returned 3.7% last week, boosted by a higher crude oil price and a weaker Dollar. China’s trade surplus advanced to a thirty-four month high of $475.8 billion in October, up from $459.9 billion previously. Volatility in emerging markets decreased last week as governments appear to be proactive regarding mass COVID-19 vaccination plans.
EUROPE
Germany supports a delay to an imminent $4 billion European tariff hike on American goods over illegal subsidies. German Foreign Minister, Heiko Maas, said that his government will suggest “concrete proposals” to the United States to prompt new trade relationships. The decision comes after Chancellor Angela Merkel congratulated Joe Biden for winning the U.S. presidential election. This could be seen as an attempt to pacify trade relations between both parties. The DAX index was up 7.99% last week.
Brexit talks between the EU and the United Kingdom continue despite key differences between both parties. President of the European Commission, Ursula Von der Leyen said in a tweet that “some progress has been made, but large differences remain especially on level playing field and fisheries”. The deadline to reach an agreement has been set for November 15th unless it is moved once again to a later date. The FTSE 100 was up 5.97% last week.
The European Commission Economic Sentiment indicator for the Eurozone stayed flat at 90.9 for the month of October. This index bottomed in April at 64.6 and gradually recovered as business and personal restrictions eased across Europe. December’s economic data will be important to gauge the efficiency of businesses in a hybrid environment. Indeed, with the experience of the first lockdown, the transition to this second lockdown should be less disruptive. Last week, investors seemed to look beyond the lockdowns as the Euro STOXX index advanced 7.49%, led by retail, up 9.51%.
APAC
In China, the Central Bank has restarted the conversation regarding scaling back monetary support as the economy is slowly getting back to normal. Liu Guoqiang, Vice Governor of the People’s Bank of China, said last week that “exit is a matter of time and it is necessary. But the timing and the method of exit need to be carefully evaluated, mainly based on the status of economic recovery”. According to Bloomberg, Economists forecast China’s economy to grow slightly above 2% this quarter. The Shanghai Composite index was up 2.72% last week, led by real estate, up 4.87%. The Chinese Renminbi continued to rally and reached levels not observed since July 2018.
In Japan, Prime Minister Yoshihide Suga ordered a third extra budget to boost domestic spending as a new wave of COVID-19 infections is impacting Japan and its trading partners. The budget is projected to range between $95B and $286B according to local media reports. Japan has already spent over $2.2 trillion in response to the pandemic to support businesses and households. In fact, the internal affairs ministry reported last Friday that household spending increased 3.6% from the previous quarter, while remaining down from last year. The NIKKEI 225 gained 5.87% last week.
EMERGING MARKETS
Brazil’s Central Bank warned that its interest rate guidance might be revisited in case of material changes to fiscal policy. Central Bank board members wrote “the committee judged that changes in the fiscal policy that affect the public debt trajectory or compromise the fiscal anchor would motivate a reassessment, even if the spending ceiling in nominal terms is still maintained”. This is a strong message sent to the Brazilian President Jair Bolsonaro and the markets, as the monetary authority plans to keep inflation under control. Brazilian stocks rallied 7.42% last week.
India faces uneven recovery as the government prepares a vaccination campaign. Guidelines regarding social distancing and business restrictions have been extended through the month of November. The unemployment rate rose above 7% in rural and urban areas. However, activity in the service sector improved from last month, as evidenced by a strong Markit Service PMI of 54.1 in October, up from 49.8 previously. The International Monetary Fund forecasts that the Indian economy will grow at -10.3% in 2020 and rebound at 8.8% in 2021. Indian stocks gained 5.34% last week.
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