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Weekly eNews: November 9, 2020

Financial Market Update

Welcome to the StrategicPoint Financial Market Update — a market and economic overview of what occurred last week and what’s up for this week. Please find our market commentary and most recent Blog posts in our StrategicPoint of View®.

Market Overview: StrategicPoint of View®

Our investment committee went into the election feeling quite positive about the equity markets for 2021. The outlook looked constructive whether the election produced a blue/red wave or divided government. As of this writing, the country is likely to end up with divided government: Democratic President and House of Representatives along with a Republican Senate.

Strategas research has taken a look at the S&P 500 annual performance under partisan control scenarios from 1933 through 2019. A split congress with a Democratic president comes out with the highest average annual returns of 13.6%. Even if a Republican presidency were combined with split government, the average return historically is 13.4%. (A blue wave would have yielded 9.3% annual returns and a red wave 4.9%).  It is good to remember that over the history of the last 90 years, the trajectory of the stock market has usually been up during most four-year presidential terms.

But those are the averages, which provide no guaranty of any particular year. So, what is in store for 2021?

To answer that question let’s start with the markets this past week. (We recognize that there are still some who feel that the presidential election has not been finalized, but for this blog we are taking the view that the markets are accepting the President-Elect Biden’s victory). The S&P 500 was up 7.3%, having been positioned for a possible blue wave prior to the election. When the blue wave didn’t materialize, the markets, which support incremental (not dramatic) change, took a more optimistic turn.  With the ability of the Senate to check the actions of President Elect Biden and/or the House of Representatives, moderate legislative changes or gridlock became the dominant expectations. Costly programs, such as Medicare for All or the Green New Deal are seemingly off the table for now. And tax increases are doubtful. All of this is good news, as far as markets are concerned.

Gridlock, however, in and of itself is not necessarily a good thing. Doing nothing in the midst of a pandemic, economic crisis, and surge in climatic forces can encourage irreparable harm while stalling any economic recovery. What Wall Street really prefers is selective actions before “good” gridlock sets in.

And here is where personal history could make a difference. The markets are betting that President Elect Biden and Senate Majority Leader Mitch McConnell can work together as they did three previous times in recent history to resolve critical issues. Biden and McConnell brokered three major deals during the Obama Administration when all other efforts at bi-partisan legislation had failed: twice (2010 and 2012) when the country was facing a fiscal cliff from potential increased taxes and spending cuts, and once at the culmination of the Debt-Ceiling Crisis in 2011. If Biden and McConnell can work effectively across the aisle at critical junctures, market analysts feel the next few years could be good ones for stocks.

Two looming hurdles exist, however, before steady economic growth, continued low interest rates and current low taxes can become the status quo and driver of the recovery. These hurdles are the third wave of the coronavirus pandemic and the need to pass an income replacement stimulus package. The big fear is that, in the short term, widespread outbreaks of the virus could lead to localized lockdowns, undoing hard won economic progress. And, with 11.7 million more unemployed people than at the start of the pandemic, failure to provide direct support to individuals, small businesses and certain sectors of the economy could cause undue hardship and a further set back to the economy. Look for both of these issues to take center stage in the next few months, providing some volatility in the markets.

Still, for now, the markets are telegraphing optimism. The resolution of the election has erased the uncertainty of who will lead the nation; there is economic momentum in certain areas of the economy (housing and manufacturing, for example) that are likely to continue; and we now know much more about the virus, as well as the vaccines and therapeutics that can help us target our healthcare response.

It has been a long hard year, one few of us will be sorry to see go. But while the next few months could still be challenging, 2021 offers hope of a sustained recovery in the markets.

Betsey A. Purinton, CFP®
Chief Investment Officer

Last Week’s Closing Numbers

S&P 500: 3509 (up 7.32% for the week and up 8.63% for the year)
NASDAQ: 11,895 (up 9.01% for the week and up 32.57% for the year)
Dow: 28,323 (up 6.87% for the week and down 0.75% for the year)
US Treasury 10yr: 0.86% (from 0.86% last week)
Crude Oil (December): $37.14 (from $35.79 last week)
Gold (November): $1,951.70 (from $1,879.90 last week)
USD/Euro: $1.1876 (from $1.1647 last week)

Last Week’s Headlines

  • October saw 638,000 new jobs added and the unemployment rate drop to 6.9%. While the number of new jobs added has decreased each month since August, the unemployment rate and the number of unemployed persons (11.1 million in October) have declined for six consecutive months. Nevertheless, both the unemployment rate and the number of unemployed persons are nearly twice their February levels, indicative of the impact of the COVID-19 virus. Notable job gains last month occurred in leisure and hospitality; food services and drinking places; arts, entertainment, and recreation; and accommodation. In October, 15.1 million persons reported that they had been unable to work because their employer closed or lost business due to the pandemic, down from 19.4 million in September. In October, 21.2% of employed persons teleworked because of the pandemic, down from 22.7% in September. The labor force participation rate increased by 0.3 percentage point to 61.7% in October, 1.7 percentage points below the February level. The employment-population ratio increased by 0.8 percentage point to 57.4% in October, 3.7 percentage points lower than in February. In October, average hourly earnings increased by $0.04 to $29.50. Average hourly earnings have increased 4.5% over the past 12 months ended in October. The average work week was unchanged at 34.8 hours in October.
  • Following its meeting last week, the Federal Open Market Committee decided to leave the target range for the federal funds rate at its current 0%-0.25%. According to the Committee, although economic activity and employment have continued to recover, they remain well below their levels prior to the beginning of the year. Weaker demand and earlier declines in oil prices have been holding down consumer price inflation. The course of the COVID-19 virus will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In addition to maintaining the federal funds target range, the Committee also indicated that it would increase its holdings of Treasury securities and agency mortgage-back securities at the current pace to sustain smooth market functioning and help foster accommodative financial conditions in an effort to support the flow of credit to households and businesses.
  • According to the latest Manufacturing ISM® Report On Business®, manufacturing registered 59.3%, up 3.9 percentage points over the September reading and the highest since September 2018, when the index was 59.3%. Survey respondents reported an increase in new orders, production, employment, deliveries, inventories, and prices. Both import and export orders also increased in October over the prior month’s totals.
  • Economic activity in the services sector increased in October but at a slower rate, according to the latest Services ISM® Report On Business®. The services purchasing managers’ index registered 56.6% last month, 1.2 percentage points lower than the September reading. A reading above 50% indicates growth. Supplier deliveries, prices, and new export and import orders each increased. Business activity/production, new orders, and employment slowed in October from September.
  • According to the Bureau of Economic Analysis, the international trade in goods and services deficit was $63.9 billion in September, 4.7% lower than the August trade deficit. September exports were $176.4 billion, $4.4 billion, or 2.6%, more than August exports. September imports were $240.2 billion, $1.2 billion, or 0.5%, more than August imports. Year to date, the goods and services deficit increased $38.5 billion, or 8.6%, from the same period in 2019. Exports decreased $329.0 billion, or 17.4%. Imports decreased $290.4 billion, or 12.4%.
  • For the week ended October 31, there were 751,000 new claims for unemployment insurance, a decrease of 7,000 from the previous week’s level, which was revised up by 7,000. According to the Department of Labor, the advance rate for insured unemployment claims was 5.0% for the week ended October 24, a decrease of 0.3 percentage point from the prior week’s rate. For comparison, during the same period last year, there were 212,00 new jobs added and the insured unemployment claims rate was 1.2%> The advance number of those receiving unemployment insurance benefits during the week ended October 24 was 7,285,000, a decrease of 538,000 from the prior week’s level, which was revised up by 67,000. The highest insured unemployment rates in the week ended October 17 were in Hawaii (11.3%), the Virgin Islands (9.6%), California (9.5%), Nevada (9.2%), and New Mexico (9.0%). The largest increases in initial claims for the week ended October 24 were in Illinois (+6,190), Michigan (+5,442), Massachusetts (+2,483), Minnesota (+1,848), and Connecticut (+1,621), while the largest decreases were in Texas (-10,113), California (-7,700), Florida (-6,528), New York (-3,291), and Louisiana (-3,096).

This Week

The predominant question this week continues to focus on the impact that the election will have on the economy in general, and on the market in particular. Economic reports available this month focus on October, so it will take a few months at the very least before we may get a clearer picture of where the economy and market are headed. In any case, economic reports this week focus on consumer and producer prices in October. Also, the Treasury statement is available for October, the first month of fiscal year 2021.


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*Past performance is not indicative of future results. Indices are unmanaged and you cannot directly invest in them. The Nasdaq Composite Index measures all NASDAQ U.S. and non-U.S. based common stocks listed on the Nasdaq Stock Market. The S&P 500 index is based on the average performance of 500 industrial stocks monitored by Standard and Poor’s. The data referred to above was taken from sources believed to be reliable. StrategicPoint Investment Advisors has not verified such data and no representation or warranty, expressed or implied, is made by StrategicPoint Investment Advisors.

Data sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Third party content does not reflect the view of the firm or of our parent company, Focus Financial Partners. LLC and is not reviewed for completeness or accuracy. It is provided for ease of reference.

Parts of this report were prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2020. Part of this content contributed by Forefield, Inc.