October 2020
Marketing Briefing

U.S. Markets

Recap

U.S. stock markets trended lower in September.  The Dow Jones Industrial Average was down 3%, the S&P 500 was down 4.1% and the Russell 2000 was down 4.5%.   The tech-laden Nasdaq also declined by 4.5%, trimming its year-to-date gain to 24.5%.

In contrast, throughout the month, some economic reports reflected modest progress toward economic stabilization and early-stage recovery.

For September, the consumer confidence index enjoyed a remarkable lift compared to recent months with the index rising to a level of 101.8.  This recent jump is notable when compared to the low of 85.7 hit in April which is also roughly where it had languished for weeks.  It still stands about 30 points short of where it was at the beginning of the year.  The list of factors behind this includes limited employment damage to higher wage workers, record prices in the stock markets, and to some extent, the added income from government stimulus checks and unemployment bonuses.  

Given that consumer spending accounts for more than two-thirds of the economy, the pattern of consumer attitudes and spending is always monitored closely by analysts, policy makers and investors. Last month’s lift in consumer confidence coincided with overall consumer spending moving in the right direction, as the September 30th report showed a modest increase of 1 percent. 

The resiliency in U.S. consumer confidence showed up more dramatically in the housing sector.  New home sales surged 10.5 percent in August.  Low mortgage rates and demographic shifts tied to COVID-19 were also key variables fueling this activity.

For the business sector, the September report on orders for core capital goods (nondefense ex-aircraft) showed a rise in August by 1.8 percent to $67.7 billion.  It was the fourth consecutive monthly increase since April. Durable goods orders are a leading indicator of industrial production.  As part of the economic backdrop, they provide insight for how busy factories will be in the months to come, as manufacturers work to fill these orders.

The unemployment rate fell to 7.9% from August’s 8.4% rate. The number of persons on temporary layoff fell by 1.5 million to 4.6 million, down considerably from the high of 18.1 million in April but 3.8 million higher than in February. The number of permanent job losses increased by 345,000 to 3.8 million and the figure has risen by 2.5 million since February.  While much of the improvement was positive in direction, the change represents a slowdown in pace and a cause for some concern.  How the employment recovery plays out in the coming months will largely depend on how the COVID-19 remedies unfold.

By month-end, much positive news of economic progress was overshadowed as COVID-19, along with politics, moved back into the forefront.  The average of daily new cases nationwide stood at a troubling 42,785, about 500 more than on September 1st, according to Johns Hopkins University, and more than double what the U.S. saw in June, when lockdown restrictions began to ease.  The recent news that President Trump, the First Lady and several prominent Republican figures have fallen ill to COVID-19 has made for a sad and disturbing turn of events.

Looking Ahead

With approximately four weeks to the U.S. elections, most companies are in the quiet period leading up to third quarter earnings season.  The bulk will begin reporting earnings the third week of October, with a continuing stream to report over the period overlapping with that of the U.S. elections.  On a sector-by-sector basis, the results are projected to vary, with continued strength expected for e-commerce, home goods, consumer staples and electronics.

U.S. employment gains are forecasted to be slow given the degree to which certain industries — hospitality, travel, leisure, restaurants, services, oil & gas, small business – are hobbled by the thorny obstacles of COVID-19, foreign and/or trade relations.

As U.S. companies commit to spending more on equipment, it’s evident that at least some are experiencing sustainable growth in their business.  At $67.7 billion in August, durable goods orders were 1.9 percent above the pre-pandemic level in February.  Such a reading speaks to confidence and will bump up the outlook for business investment.

The near-term outlook for both consumer confidence and spending is at best, uneven, and generally subdued, especially given the recent expiration of special government stimulus benefits and the heretofore absence of another round.  Thus, the delivery of another round of fiscal stimulus, especially to those hit hardest by the pandemic, will be of major importance for supporting the stability of asset prices, and likewise reinforcing consumer confidence and spending.

While the likelihood of an additional round of stimulus is high, what remains to be seen is when the political theater and power struggle surrounding U.S. elections will allow for its passage.

Given the many uncertainties at hand – third quarter earnings reports, heightened unemployment, U.S. elections, fiscal relief negotiations, and the persistent prevalence of COVID-19, emotions and thus volatility will likely remain elevated at least through the conclusion of the U.S. elections.

Any specific securities referenced in this commentary may or may not be held in client portfolios.
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