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For the month of March

The month of March put a nice bow on a very friendly quarter for stocks, commodities, and the USD – leaving the S&P 500 and DJIA at fresh record highs. It also put an exclamation mark on a very dark quarter for bonds as interest rates continued their ascent leaving a mark on broader fixed income markets. Market drivers for the month included significant fiscal stimulus with passage of the $1.9t American Recovery Act, strong momentum in most economic data, anticipation of a larger infrastructure spending package, and positive vaccine news counterbalanced by increasing case counts globally. The U.S. led most global equity markets with the S&P 500 returning 5.8%. Value continued to outperform growth stocks with industrials, financials, materials, and consumer staples setting the pace. Small caps took a relative breather in March (+1%) while international developed (+2.3%) and emerging markets (-1.5%), faced with a strengthening USD and Covid-19 challenges, lagged U.S. markets. Interest rates in the U.S. continued their march higher across intermediate and long-term maturities with the 5yr moving from 75bps to 92bps and 10yr from 144bps to 174bps – meanwhile, the short end remained anchored by the Fed (2yr moved from 14bps to 16bps). Commodity markets were mixed during March with headline indices losing approximately 2% driven by oil’s -3.8% tally.

Market Anecdotes

• The bull market hit its one-year anniversary mark last month putting the trough to record high move on the S&P 500 close to 75%, the best 1-yr return since the 1930’s.
• From the 3/23/20 Covid lows through 9/2/20 performance of the S&P 500 and the average stock within the S&P 500 were relatively in line but since 9/2/20, the S&P 500 is up approx 10% while the average stock in the index rallied more than 2.5x that number, nearly 25%.
• Bespoke pointed out the consolidation we’ve seen in some of the high weight/high profile tech names has compressed their valuations to interesting levels including FB (early 2018), APPL (minus 6 turns in two months), and AMZN (early 2014). 
• Include us in the group of investors who are pretty surprised that a -12% correction in the Nasdaq 100 left the rest of the market basically untouched. Long duration cash flow equities and bonds are the only real casualties of the move higher in yields thus far.
• The March FOMC meeting delivered a decisive dovish tone as expected with a message of no expectations for rate hikes through 2023. Powell also made clear that both the mix and size of QE are appropriate, seeing near term inflation pressures as slow moving and transitory. 
• The market and the Fed are pricing (forecasting) very different views of monetary policy over the next 2+ years. Only 7 out of 18 FOMC participants expect any rate hikes before the end of 2023, while the market sees over four 25 basis point hikes by then. 
• The ECB, BoE, and BoJ left policy rates and QE programs unchanged and remained in sync on the need for ongoing policy accommodation. The BoJ did lay some groundwork for future policy tightening by increasing the +/- band around 0% and removed explicit ETF guidance.
• Washington had a busy month. It delivered $1.9t of stimulus in the American Rescue Plan on March 11th and floated details of a proposed infrastructure bill which is expected to be far less consequential to GDP and inflation than CARES, CAA, and the ARA.
• BCA estimates U.S. households were sitting on $1.7t in excess savings at the end of February. A third stemming from stimulus payments and two thirds stemming from consumers just spending less during the pandemic. 
• The USD continued its countertrend rally in March. The relative nature of US to non-US growth and US to non-US real yield differentials will be the USD drivers longer term. 

Economic Release Highlights

• The March jobs report far exceeded consensus estimates (916k v 658k), leaving the unemployment rate at 6.0%. 
• The March ISM Manufacturing Index of 64.7 came in well above consensus calls for 61.5. Strong new orders, surging costs, and slow deliveries were again very clear. March ISM Services Index crushed expectations (63.7 v 58.6), surging well above February’s 55.3 level.
• March U.S. flash PMIs (59.1c, 59.0m, 60.0s) remained extremely elevated and in line. Japan (48.3c, 52.0m, 46.5s) numbers were generally in line but the EU surprised nicely to the upside (C: 52.5 v 49.1), (M: 62.4 v 57.7), and (S: 48.8 v 46.0).
• The Income and Outlays Report released in March carried no surprises with Income (-7.1% v -7.2%), PCE (-1.0% v -0.7%), and core PCE Prices (1.4% v 1.5%) all coming in near forecasts.
• February Retail Sales fell well short of expectations (-3.0% vs -0.5%) after an extremely robust January result. Weather was likely a material factor.
• Consumer Confidence in March surged higher to 109.7, handily outpacing the consensus forecast of 96.0. The UofM Consumer Sentiment Index (f) registered more improvement than expected (84.9 v 83.3).
• Housing market data released in March revealed slowing mortgage applications (higher rates) and sagging sales likely due to winter weather (existing sales (6.22M v 6.50M), new sales (775M v 875M), and pending sales (-10.6%). 
• Short housing supply likely factored into the January Case-Shiller Home Price Index coming in toward the high end of estimates +1.2% M/M and +11.1% Y/Y.  The March Housing Market Index stayed very elevated and near consensus forecast (82 vs 83).

For the month of February 2021

February came in with a reflationary bang (11 straight days of gains) on the basis of a growing CoVid-19 retreat and encouraging economic outlook but left with a whimper (8 of 9 days of losses) as concerns mounted that the economic recovery combined with aggressive global fiscal and monetary policies may translate to higher inflationary conditions. Overall, constructive forces of big stimulus talks, vaccine progress, economic recovery, and strong corporate earnings pushed global equities and, more notably, global interest rates higher. Overall, the month of February delivered a reflationary message with cyclically oriented stocks (value), small caps, and commodities (oil +20%) all delivering healthy gains.   

Market Anecdotes

• Brief reminder to what feels like 10 years ago – one year ago last February, the S&P 500 closed at a record high, then went on to lose 33% over the next five weeks.
• February continued a rotation out of last year’s winners (growth stocks) into last year’s losers (value stocks). Rising interest rates and improving economic activity were the primary drivers behind the pressure on longer duration stocks and, conversely, a tailwind behind cyclical sectors.
• Nearing the one-year anniversary of the CoVid bear market, Strategas noted the first year off the low is historically the best. While the second year is still good, it typically weathers some volatility.
• Rates moved both higher and steeper last month. Curve steepening has been pronounced with the 2-10 closing February at 1.30% and the 3m-10 at 1.40%. While bonds are oversold in the short-term, the long-term trend should eventually take 10yr yields into the 2.0%-2.5% area. 
• The rise in UST yields thus far has them still in very low absolute levels and nowhere near ‘restrictive’ territory. BCA highlighted eight episodes since 1990 of sharply rising UST yields wherein 7 of 8 coincided with strong equity market returns.
• Bespoke broke the UST curve into 4 segments (3m2y, 2y5y, 5y10y, 10y30y) to evaluate steepening within the yield curve, concluding the market sees the Fed on hold for now but moving aggressively after liftoff while the long end isn’t indicating real inflation risks as of yet.
• Significant debate continued surrounding what level of yields will begin to prove troublesome for equities. The answer is likely when inflation actually materializes or when inflation expectations reach more alarming levels.  Market internals remain encouraging at this time. 
• High yield spreads are an important indicator of market risk sentiment (pricing credit risk). High yield OAS dropped from 384bps to 357 during February – significantly compressed from the 1083bps high back in March 2020.
• Central bankers around the world (Fed, ECB, BoJ, BoE) delivered uniform messaging that they intend to remain accommodative for the foreseeable future. Meanwhile, markets are busily handicapping whether bankers will find themselves behind the inflation curve. 
• Vaccination progress in the U.S. remains very positive while non-U.S. countries are lagging.  
• The Atlanta Fed GDPNow Q1 estimate surged to 9.5% after factoring in the economic data last month (retail sales, industrial production, regional surveys).
• The $1.9t American Rescue Plan took shape in February and passed Congress in early March before unemployment benefits lapsed. State aid, CoVid funding, stimulus checks, extended unemployment benefits, and child tax credits were among many stimulative measures in the bill. Strategas estimates over $1t will be distributed over the next five months ($700b to consumers).

Economic Release Highlights

• The February jobs report reflected 379,000 new jobs, well in excess of expectations, and unemployment falling to 6.2%. The Leisure & Hospitality sector rebounded nicely however; the overall economy remains significantly underemployed.
• January Personal Income and Outlays report showed MoM personal income (10% vs 9.4%) and personal consumption (2.4% vs 2.2%) both higher than expected while core PCE was generally in line with expectations at MoM (0.3% vs 0.1%) and YoY (1.5% vs 1.4%).
• January Retail Sales crushed consensus forecast (5.3% vs 1.1%) on the headline number as well as all sub-index metrics including ex-vehicles & gas (6.1% vs 0.5%) and control (6.1% vs 0.9%).
• February’s U.S. ISM manufacturing (60.8) and services (55.3) readings reflected strong new orders, a build in backlogs, and an overall encouraging backdrop.
• February’s final U.S. PMI manufacturing (58.6) and services (55.3) readings remained well in expansionary territory.
• February Housing Market Index (84 vs 83) was in line with estimates, continuing to reflect extraordinarily positive homebuilder assessments of current housing market conditions. January Housing Starts (1.580M) and Permits (1.881M) missed and beat forecasts respectively after strong beats the prior two months. December’s Case-Shiller Home Price Index rose more than expected for a second consecutive month at MoM (1.3%a vs 1.0%e) and YoY (10.1%a vs 9.6%e). New (923k vs 855k) and Pending (-2.8%a vs 0%e) Home Sales were mixed with new exceeding pending continuing to lag.
• January Durable Goods Orders accelerated faster than expected (3.4% vs 1.1%), well over December’s 0.5%, providing further evidence of an upward trending manufacturing cycle.
• Conference Board Consumer Confidence for February came in higher than expected (91.3 vs 90.0) but remained somewhat subdued.
• The final UofM Consumer Sentiment for February remained at the relatively subdued level of 76.8a vs 76.4e.

Global equity markets continued their ascent in the first few weeks of the year, looking past a low-grade insurrection attempt, single party control of DC (D-sweep), a big miss on the December jobs report, and some rich stock market valuations, instead focusing on widespread vaccination efforts, improving corporate earnings, and a continuation of the stimulus charged economic recovery. That view didn’t hold through to month-end however as trading gave way to profit taking on relatively strong earnings reports and a heavy dose of irrational trading emanating from retail investors (GME). 

The month ended with U.S. small and mid-caps posting healthy gains of 6.3% and 1.5% respectively while the large cap S&P 500 fell 1%. Developed international markets (-1.1%) were in line with the S&P 500 but emerging markets posted a strong 3.1% return driven largely by East Asian markets of China, Korea, and Taiwan. The USD strengthened 0.72%, interrupting the downtrend in place since March and the commodity complex (ex-gold) rallied nicely to begin the year up nearly 5% thanks to large moves in energy (oil +7.5%), grains, and industrial metals. Interest rates on the long end of the yield curve made a notable move higher with 10s to 30s rising 18-23bps while the short end remained firmly anchored by Fed policy leading to a material 0.20% steepening in the yield curve during the month. 

Market Anecdotes

• The late month volatility left the S&P 500 closing at its low for the month on the last day of the month.
• With 59% of the S&P 500 reported, FactSet is reporting blended earnings of +1.7% with results a whopping 15.2% above estimates and a record beat rate of 81%. Revenue growth of 2.7% with similarly strong beat rates and beat margins. Street analysts were clearly way too bearish on Q4. 
• Markets began to discount the policy outcomes of the D-sweep which materialized after the GA senate runoff. Pro-growth infrastructure and fiscal stimulus were the predominant near term takeaways while tax policy and regulation loom as longer term concerns.. 
• Policy with potential market implications include aggressive fiscal spending (budget deficits), partial reversal of Trump’s tax cuts, improved trade relations, relaxation of some tariffs, antitrust momentum, energy/healthcare regulation, and immigration.
• Markets applauded the slim D majorities in Congress which will likely ‘center’ several of the more progressive initiatives. Bespoke noted while ‘gridlock is good’ is a familiar mantra, full party control in DC hasn’t been bad either, particularly one with a slim margin of control. 
• Since WWII there have been 12 sessions of Congress with the Democrats in full control.  Markets were up 10 of 12 times with an average gain of 16.7%. 
• Existing 2021 fiscal spending plus proposed stimulus of close to $1.9t equates to 10% of GDP. The proposed $1.9t package offsets an otherwise projected $1.5-$1.6t fiscal contraction in 2021, eliminating the possibility of any removal of fiscal policy accommodation.
• BCA noted the CBO’s updated projections for 2021 GDP and 2021 GDP potential last month indicating the modeled monthly output gap in the U.S. is set to collapse from $80b to only $35b. With a backdrop of somewhere between $200b and $300b in fiscal stimulus in play, this presents a risk to market consensus of low to moderate inflation looking forward.
• With Fed balance sheet assets at $7.415t and reserve liabilities projected to pass $6t by the end of the year, liquidity has been and will remain to be a driving force in the market.
• The ECB, BoJ, and Fed all held policy meetings in January leaving policy rates and bond buying programs unchanged across the board while emphasizing downside risks to economic growth due to the status of the pandemic.
• Jeremy Seigel noted in a FT op-ed last month that money supply (M2) in the U.S. just posted its highest growth rate (+24.21%) in over 150 years.
• Municipal bond issuance in 2020 was the highest in a decade, reflecting the collapse of interest rates and the increased costs cities and state governments are facing from Covid-19 shutdowns.
• The savings rate has fallen from 33.7% last April to 12.9% in November and household cash reserves have gone parabolic during the pandemic, resulting in a historically energized consumer balance sheet to power the economy forward into 2021.

Economic Release Highlights

• The January employment report disappointed with payrolls rising less than half of expectations (49k vs 105k) but the unemployment rate falling more than expected (6.3% vs 6.7%). 
• Q4 GDP grew 4.0% QoQ, relatively in line with expectations but well below the Atlanta Fed GDPNow estimate of 8%. Annual PCE came in a below expectations (2.5% vs 3.0%).
• January ISM Manufacturing index of 58.7 registered just shy of the (red hot) consensus 60.0 while ISM Services index came in at 58.7, handily above the 56.8 consensus.
• The final U.S. PMI readings (C,M,S) came in well above December levels and beat estimates, registering 58.7, 59.2, and 58.3 respectively for January.
• JPM Global PMI index saw the composite and services fall slightly in January to 52.3 and 51.6 respectively while manufacturing improved to 53.5. Moderation was expected due to CoVid related lockdowns. 
• It became clear in January that the December holiday shopping season underwhelmed. December retail sales missed expectations (-0.7%a vs -0.1%e) at the headline level and all subsets including the control group (-2%a vs 0.2%e).
• Personal income and outlays report for December showed personal income +2.8% including transfer receipts. PCE price index is showing signs of life but again due to supply chain issues.
• The push and pull of the U.S. capital insurgency and vaccine progress didn’t impact the January UofM consumer sentiment index which came in as expected at 79.2.
• December housing starts (1.669m vs 1.558m), permits (1.709m vs 1.610m), and existing home sales (6.760M vs 6.550M) all exceeded consensus and the top end of expectations.
• The Case-Shiller home price index came in higher on both the M/M (1.4% vs 0.8%) and Y/Y (9.1% vs 8.4%) basis. 
• The January Housing Market Index came in below expectations (83a v 86e), showing some cooling of sentiment across homebuilders BUT is just coming off a 35-year record high.

Commentary

Bull market top in January? Doubtful. Expectations for a renewed CoVid fiscal package, historically accommodative monetary policy, tight credit spreads, vaccines getting into arms, and improving economic fundamentals leave us seeing more checks in the pro-risk camp than de-risk camp at this time. Due to the aforementioned accommodation and ongoing global recovery, we are maintaining our constructive view of the markets, favoring cyclical areas and risk assets (stocks, corporate bonds, commodities) over defensives and risk free assets. 

Global monetary stimulus has been aggressive for some time now (QE, ZIRP, NIRP, credit facilities, yield-curve control) and fiscal policy is clearly following this lead. Market internals (semis, transports, cyclicals, small caps) and technicals are confirming our view at this time. A spring-loaded consumer, robust manufacturing sector, booming housing market, improving earnings, and the rollout of CoVid vaccines all factor into our view.  

That said, some routine market consolidation is probably overdue and always inevitable. The stock market has become fairly well extended in terms of valuations and overbought technically, but these are generally shorter term risks, not necessarily risks of a bear market. Risks of unanticipated inflation or material shifts in policy are key factors as we consider risks to our constructive view.

 

This communication is provided for informational purposes only and is not an offer, recommendation or solicitation to buy or sell any security or other investment.  This communication does not constitute, nor should it be regarded as, investment research or a research report, a securities or investment recommendation, nor does it provide information reasonably sufficient upon which to base an investment decision.  Additional analysis would be required to make an investment decision. This communication is not based on the investment objectives, strategies, goals, financial circumstances, needs or risk tolerance of any client or portfolio and is not presented as suitable to any other particular client or portfolio.

One of our favorite Christmas traditions is taking part in STAR 102.5’s Christmas Wish. This holiday season we’re honored to grant two Christmas wishes, on behalf of Silvercap and our clients.

This year has been challenging for everyone, yet many families have been faced with additional tragedy and obstacles that made an already difficult year worse.

Please take a moment to listen to the clips below from Star 102.5 granting this year’s Christmas wishes.

We are very grateful for our clients’ long-term support and confidence, and look forward to many (better) years ahead.

Happy Holidays to you and yours,

Josh, Paul, Brent & Danielle

A choppy early November gave us the worst pre-election week performance on record but was followed post-election by the strongest week since April positive sentiment prevailed for most of the month. Relative clarity on the election outcome and corresponding policy outcomes propelled markets to the best November for the S&P 500 since 950 and the first time since 1982 we’ve had two double digit months in one calendar year. Strong COVID-19 vaccine trial results and continued economic recovery momentum overwhelmed a resurgence in COVID-19 case counts globally in terms of risk asset performance. Cyclical and value-oriented areas of the market outperformed technology and growth for the month. Joe Biden won the U.S. presidency and markets cheered what looks like a split/gridlocked election outcome, albeit still uncertain with the Georgia senate runoff races outstanding. One key anxiety point is that fiscal negotiations for another COVID-19 relief package stalled throughout the month and remain unclear today.   

The S&P 500 was up a remarkable 11% in November after two consecutive down months while small caps (+18%) and developed market international stocks (+15.5%) moved even higher yet. It was the largest monthly gain for the DJIA since 1987 and the largest ever for the Russell 2000! From a sector standpoint, we saw cyclical areas like industrials (+13.4%), materials (+13.1%), and financials (+11.69%) dramatically outperform technology (+0.07%), healthcare (+1.7%), and real estate (+1.28%). Commodities (+13%) had a stellar month with several boasting returns in the top decile of their respective historical ranges, including oil which was up 27%. The USD declined another 2.3% in November taking the one-year decline to -6.5% despite the big flight to safety bid back in March.

Market Anecdotes

• Markets applauded the likely election outcome of D POTUS / R Senate which puts tax hikes, infrastructure spending, green new deal, and major healthcare reform to the back seat. A Biden administration would be more likely to focus on foreign policy issues including ending trade wars, slowly negotiating eliminated tariffs, and pro-growth immigration policies. 
• The Georgia senate runoff races are tightening based on polls and betting market odds which have taken odds of a Republican senate down from 87% on November 3rd to 71% this week.
• The election outcomes also resulted in a more tenuous fiscal CoVid-19 relief package outlook under the divided government scenario at a time where government spending contribution to GDP growth turned negative for the first time in 25 months during 3Q.
• Current partisan lines in the sand are at $500b (Republican) and $900b (Bipartisan moderates) respectively with 13.5mm Americans in line to lose unemployment benefits at year-end.
• November may have offered a glimpse of what equity market internals and leadership may look like once CoVid-19 eventually begins to lift with notable market breadth, value, international and cyclical leadership emerging. 
• Q3 2020 earnings officially ended with the glass half full. S&P 500 top and bottom lines contracted by 2.4% and 2.6% respectively but far surpassed expectations and came with generous upward forward guidance. Interestingly, ex/energy (-$14.3b), airlines (-$13b), and hotel/restaurant/leisure (-$9.7b), the S&P would have reported 4.3% growth in earnings.
• Leuthold Group highlighted the relatively attractive valuation for small caps, making the case that both SCV (17x) and SCG (24x) are historically cheap relative to historical averages. Small growth is trading at approximately 50% of valuation measures it reached in ‘00. 
• The Russell 2000 hit a CoVid-19-panic low of 966.216 on March 18, 2020 and remained a relative laggard until it’s November surge, now up over 90% in 9 months! During this time, US Nominal GDP fell about 1.6% and trailing 12-month R2000 earnings are down 2.52%.
• U.S. Treasury secretary Steve Mnuchin requested the Fed return unused funds of several CoVid-19 Fed stimulus programs and will not seek to renew them upon their 12/31/20 expiration. Municipal and corporate credit markets may be particularly exposed near term.
• The Fed is expected to ramp up longer duration UST purchases in light of the Treasury announcement of sunsetting Fed bond facilities and may now be considering supplemental monetary action at their upcoming December meeting.
• M2 is growing at 24% and has been growing at +20% for over six months with little sign of slowing well into 2021. The Fed balance sheet surged to new record highs, currently at $7.24308T. The ECB balance sheet also hit a record high last month.
• The battle with CoVid-19 took a significant turn for the better from both an efficacy (90%+ vaccine efficacy rates) and time to market standpoint while simultaneously taking a turn for the worse in terms of case counts, hospitalizations, deaths, and human mobility.  
• Copper went parabolic in November with a 13.7% gain, now up 52% off the March lows and at its highest level since Q1 of 2013. The combination of the rally in copper, commodities, cyclical sectors, and banks alongside weakness in gold implies a stronger global economy than rates.
• USD aiding Intl equity performance. Since the Bloomberg US Dollar Index’s peak on 3/23, it has erased all of its COVID-19 gains and more, falling over 11% to its lowest level since May 2018.

Economic Release Highlights

• November jobs report confirmed a slowing labor market backdrop with ‘only’ 245,000 new jobs, down from 611,000 in October, and a headline unemployment rate of 6.7%.
• Retail sales came in slightly below consensus on the headline (0.3% vs 0.4%) and more so on ex-vehicles & gas (0.2% vs 0.6%) and the control group (0.2% vs 0.4%).
• October’s Personal Income and Outlays report revealed disappointing personal income (-0.7% v 0.1%) but in line PCE growth of 0.5%. Core PCE price index was in line as well at 1.4% YoY.
• November flash U.S. PMIs (C, S, M) all came in handily above consensus and now deeply in expansionary territory at 57.9, 56.7, and 57.7 respectively.  November ISM Manufacturing and Services readings of 57.5 and 55.9 respectively show a resilient U.S. economy, certainly among mid and larger sized businesses. 
• November’s Global manufacturing PMI climbed from 53 to 53.7. 74% of countries in the index registered above a 50 reading. EZ PMIs (45.1, 53.6, 41.3) missed expectations while the U.K. (47.4, 55.23, 45.8) beat handily across the board.
• October durable goods report came in higher than expected across headline (1.3% v 0.9%), Ex-transports (1.3% v 0.3%), and core goods (0.7% v 0.6%) components. Industrial production rebounded to 1.1% from unexpected decline the prior month and slightly in excess of forecast.
• The most recent Conference Board U.S. LEIs revealed a sixth consecutive monthly increase (0.7%) but also a decelerating pace of advances.
• Conference Board consumer confidence for November came in short of consensus (96.1 v 98.0) likely reflecting the CoVid-19 surge and policy uncertainty in the coming months.
• November’s final UofM consumer sentiment reading fell to 76.9, short of consensus estimate of 77.2, likely a reflection of Republican initial sentiment after the election.
• November’s Housing Market Index surged to 90 from October’s much higher than expected level of 85. Housing starts (1.530 v 1.460), permits (1.545 v 1.560), and existing homes sales (6.854 v 6.470) further substantiated the robust backdrop of the housing market.
• Case-Shiller House Price Index continued its torrid pace in September, coming in well above expectations (1.3% v 0.5% MoM) (6.6% v 5.4% YoY) across the 20 metro region samples.
• New Home Sales for October of 999k annualized was higher than expected and right in line with September’s strong pace of 1002.

FOR THE MONTH OF SEPTEMBER

September had its strongest ‘opening day’ since 2010, then remembered which month it was (it has been the worst month historically for markets). With the help of a continuous fiscal policy loop, emerging fall CoVid trends, and ample political fodder, the S&P 500 dipped its toe into correction territory on an intraday basis and the NASDAQ made its way there in record time (3 days) – off an all-time high no less. U.S. stocks erased a good portion of the month’s losses in the last 7 trading days but ended down 3.8% on the month while non-U.S. stocks overcame a strengthening USD to finish down only -2.5%. Materials, industrials, and utilities were the top performing sectors while energy and big technology lagged. Interest rates remained range bound, not really echoing the risk off tone as 10yr yields fell only 3bps, from 0.72% to 0.69%. Credit spreads moved higher (502 to 541) but also not to an alarming extent. Commodities lost ground for a second consecutive month as energy, industrial metals, and gold finished in the red. Monetary policy support remained consistent but on and off again fiscal policy negotiations and DOJ antitrust rhetoric against big technology companies drove market volatility with looming U.S. elections and associated uncertainty feeding into the backdrop.

Market Anecdotes

· The month-end July termination of extended unemployment benefits equating to $15b/week (4% of GDP) began to weigh heavily on market psychology in September as spending priorities and political considerations stalled renewed fiscal stimulus package negotiations.

· The Senate handed its stimulus proxy to the administration in September with the WH coming to $1.5t and the HOR at $2.2t. Hopes of a fiscal deal grew more unlikely with the national elections and SCOTUS nomination taking center stage.

· A material risk is a ‘no deal’ stimulus followed by a contested election, forcing the consumer to spend remaining savings with a decelerating job market recovery as the backdrop. Conversely, ‘a deal’ followed by a fiscally supportive election outcome would be bullish.

· Polls and betting markets see a Democratic-sweep as the most likely election outcome which we read as relatively neutral from a market perspective near term with increase in taxes and regulations offset by sizable stimulus, more stability in foreign relations, and eliminated tariffs.

· FOMC meetings in September and an unprecedented roster of Fed speaking engagements made clear accommodative monetary policy is here to stay and more fiscal support is a must.

· CoVid trends in September can be categorized as seasonal/second wave concerns rising globally but somewhat neutralized by increasing expectations for a vaccine in 2021 and lower fatality rates (demographics, improved therapies, mask wearing).

· Progress continues to be made on developing a viable vaccine. According to The Good Judgment Project, about 60% of “superforecasters” expect a mass-distributed vaccine to be available by Q1 of 2021, up from 45% just four weeks ago.

· Growth’s eleven-month streak of outperforming value came to a screeching halt in September which, up until the final week, was on pace for the largest value advantage since 2001.

· Non-U.S. stocks (-2.5%) also bucked the trend of U.S. (-3.8%) outperformance with Japan, South Korea, India, Mexico, and Denmark posting positive returns.

Economic Release Highlights

· The September jobs report missed expectations (661k vs 894k), but the unemployment rate fell from 8.4% to 7.9%, thanks in part to declining labor force participation. The pace of the labor market recovery has slowed sequentially over the past three months.

· U.S. Flash September PMI (CMS) of 54.4, 53.5, 54.6 was slightly lower thanks to a softening in the services component but manufacturing increased and all were solidly in expansionary territory.

· August durable goods orders were expected to slow from July’s 11.4% but came in well below expectations (0.4% v 1.5%), while the core capital goods component beat 1.8% to 1.7%.

· The Conference Board’s September consumer confidence reading of 101.8 crushed consensus of 88.8, marking the biggest confidence increase in 17 years..

· UofM final September consumer sentiment of 80.4 came in higher than consensus of 79.

· Existing (10.5% YoY), new (1.011mm vs 875k), and pending homes sales (8.8% vs 3.1%) all handily beat expectations. Case Shiller HPI increased 0.6% MoM and 3.9% YoY and the Housing Market Index followed a record August with a new record September of 83.

· August retail sales fell short of expectations on the headline number (0.6% vs 1.0%) and each subset group. However, we are now 1.5% above pre-CoVid level of retail sales.

· After tying an all-time record high of 78 in August, the Housing Market Index came in well above consensus of 78 and higher than the high end of the range (75-81), registering 83 in September.

For the month of August

Global stocks rose for a fifth consecutive month in August, led by the S&P 500 +7.2% return (more like what you’d expect in a full calendar year), ranking as the 5th best August on record since 1930 and culminating the best five month stretch for the S&P 500 since August 1938. International stocks (+5.1%), U.S. small caps (+5.5%), and emerging markets (+2.2%) produced very nice results as well. The S&P hit new record highs and did so with record breaking consistency finishing the month with a streak of seven consecutive record high closes. Technology and consumer stocks led markets while interest rate sensitive utilities and REITs lagged.  Risk markets overall were undeterred by stalled stimulus talks, CoVid-19 hotspots, social unrest, and extended valuations opting instead for encouraging central bank dovishness, massive liquidity, recovering economic activity, and ultra-low interest rates. Bond markets also moved toward a more reflationary stance in August.  The curve slope (10yr-2yr and 10yr-3mo) steepened from approximately 0.45% to 0.60% while 10yr yields moved from 0.55% to 0.72%. Commodities rose across the board while the U.S. dollar fell for a fifth consecutive month.

Market Anecdotes

• Not only did August culminate a spectacular five month return of 35%, but it also tallied the highest level of insider selling (approximately $5.3b) since November 2015.
• August’s consistency was also remarkable. Bespoke noted the S&P 500 traded higher 17 of 20 trading days in August (81% hit rate) which is the highest monthly winning percentage since SPY began trading in 1993. Only six times have we seen a winning percentage over 75%. 
• Top heavy indices? At month end, the top 1% of stocks make up 47.8% of NASDAQ, 33.5% of R1000G, 22.7% of S&P 500, and only 5.9% of the Russell 2000. 
• S&P 500 equal weight vs S&P cap weight YTD performance stands at its second largest discrepancy (>10%) since 1990, with 1998 being the only year more pronounced. The ten largest stocks have averaged +27% while the smallest 400 averaged -2.0%.
• Equity market ETFs in August managed a moderate $17.9b in inflows but of note is that the rolling 3-month sum of flows just shifted to its first positive number since January.
• The sentiment picture is mixed with the 50dma CBOE put/call ratio reaching its lowest level since 2000 while AAII and consumer confidence reports suggest a far less bullish outlook.
• Earnings ended the dismal second quarter with a 37% decline in earnings. However, both the percentage of and magnitude of positive surprises set all-time record highs since FactSet began recording the data series back in 2008. Q3 estimates are being revised higher as well.
• BCA noted the transports to utilities ratio moved notably higher in August, historically a decent signal for cyclicals relative to defensives and higher nominal bond yields on the back of an improving economic outlook and fading deflationary concerns.
• The Bloomberg U.S. Dollar Index fell for a fifth consecutive month in August, ending the month at its lowest level since May of 2018.
• August saw a notable yield curve steepening with the 2yr/10yr moving from 0.41% to 0.60% and the 3mo/10yr from 0.43% to 0.64%, echoing the reflationary theme of equity markets.
• The Fed and Jerome Powell fell a little short of a ‘full Draghi’ at August’s annual Jackson Hole symposium but were very dovish nonetheless by detailing their ‘symmetric inflation’ approach to guide policy looking forward. Risk markets appreciated the tone.
• Liquidity please?  Global central bank balance sheets (Fed, BoJ, ECB, PBOC) are growing 33% YoY, mostly by the BoJ and ECB, coming in second historically (in aggregate) only to the GFC in 08/09. Simultaneously, U.S. money supply (M2) is growing at 23%, far in excess of the GFC.
• While DC has yet to deliver a follow on fiscal support deal, consumers are spending what they’ve saved with savings rate falling from 33% to 19% and an estimated $1t of stimulus yet to be spent over the next 12 months – a likely reason markets haven’t panicked just yet.
• With conventions done and 2 months to the election, the Biden/Trump spread in the betting market odds (Predictit) has compressed to its narrowest level since June 8th ($0.56 vs $0.47). 
• Bespoke’s Matrix of Economic Indicators moving from a -34 reading on 3/20 to a +27 reading in August best illustrates the steepest crash of economic activity perhaps in US history was followed by a summer bounce back that may be just as extraordinary – both record readings.
• High frequency activity indicators haven’t made material improvement over the past several weeks. Q3 GDP (QoQ) models we monitor include Bespoke 28.2%, Strategas (25%) NY Fed WEI 17%, and Atlanta Fed GDP Now 25.6%. 2020 GDP is forecasted in the -3% to -6% range.
• Clear signs of corporate and consumer distress are just beginning to emerge. New Generation Research reported a record 45 large company (>$1b in assets) bankruptcy filings in August. Mortgage delinquencies showing extremely high delinquencies (8%) with categorically low foreclosure rates of 0.03% (Q2) due to COVID foreclosure moratoriums. 

Economic Release Highlights

• 371mm jobs created in August beat expectations with unemployment rates falling to 8.4% (U3) and 14.2% (U6). However, the number of permanent job losses increased again, and we are only halfway back to the 152mm payroll figure registered pre-CoVid-19 back in February.
• August ISM manufacturing index rose sharply and handily beat expectations (56.0a vs 54.5e). The ISM non-manufacturing of 56.9 and ISM composite of 56.8 were encouraging as well.
• The final U.S. August PMI manufacturing read was revised downward slightly from 53.6 to 53.1. The global August manufacturing PMI increased 1.2pts to 51.8, a second straight month of expansion and fourth consecutive month of improvement.
• July durable goods orders of 11.2% MoM crushed consensus of 4.3% and added to May and June’s recovery trajectory.  
• After sinking sharply in July to 91.7, August’s consumer confidence reading declined further and fell far short of expectations (84.8 vs 93.0). UofM consumer sentiment came in slightly higher than expected at 74.1 vs a 72.8 forecast. 
• August Housing Market Index (homebuilder sentiment) tied a record high reading of 78, easily surpassing expectations for a 74. Starts (1.496mm vs 1.24mm) and permits (1.495mm vs 1.32mm) blew the doors off. This was the best building permits number since January.
• Existing home sales (5.86mm vs 5.4mm), new home sales (901k vs 774k), and pending home sales (5.9% vs 1.5%) all grew well in excess of consensus expectations.  Existing home sales increased 24.7% MoM while new home sales beat estimates for a third straight month. 

The stock market shrugged off fiscal inaction in DC, concerning COVID trends in early July, huge second quarter earnings declines, and cratered economic activity to post substantial gains.  Always a forward discounting mechanism, equity markets instead focused on eventual fiscal compromise in DC, improving COVID trends and vaccine news, a V-shaped recovery across several economic indicators, and very encouraging earnings guidance from corporations.  Interest rates fell uniformly across the curve leaving the 10yr and 2yr UST yielding a paltry 0.55% and 0.11% respectively by month end.  The USD fell nearly 5% against foreign currencies in July as twin deficits, growth differentials, and the prospect of a fiscally united European Union plagued the dollar.  Commodities posted solid gains punctuated by big moves in gold (+8.6%) and silver (+30%).

Market Anecdotes

• The looming month end lapse of unemployment benefits came and went with no deal in place. An early August POTUS executive order appeased markets and bought negotiators more time.
• The stream of (U.S.) COVID news flow seemed to transition to a less threatening trajectory in the back half of July with decreasing trends in death rates, case counts, hospitalizations, and doctor visits couple with encouraging indications on vaccines under development from Oxford, Astra-Zeneca, Pfizer, BioNTech, CanSino Biologics, Moderna in limited human trials.
• The ebb and flow of COVID trends since February seen in the U.S. is happening globally with some European countries beginning to show increased numbers recently.  Markets will likely have to deal with the uncertainty of subdued activity and growth as we enter the fall. 
• An important de facto fiscal union in Europe came out of the mid-July EU summit where the ‘frugal four’ signed off on the first ever EU backed bond, a ‘Coronabond’, eligible to be purchased by the ECB.  This catalyzed Euro bulls, but time is needed to test member fiscal commitments. 
• With approximately 90% of companies reported, 2Q S&P earnings declined -33.8% but that’s compared to a -43% estimate at beginning 2Q.  83% of companies are beating estimates by a record wide margin of 22.4% and the guidance spread of +18.6% is extraordinary.  
• Global central bank balance sheets are growing 33% YoY, driven mostly by the ECB and BoJ because the Fed’s has stalled around $7b since May.  The Fed’s $4.18t UST holdings are now greater than all other foreign central banks combined. Additionally, money supply (M2 YoY) is growing at a 23% clip.  Liquidity abounds. 
• July saw ample cooing from the Fed with more talk of yield curve control (YCC) and more aggressive long-term forward guidance. Inflation expectations, as measured by 10yr real UST yields are near record lows of -1%.
• The USD lost 6% over 50 trading days, leaving it -10% from its March highs and at its lowest level since May 2018. 
• July 2020 saw gold eclipse its prior record high of $1920.7 back in September 2011. 
• The tech sector weighting is now over 27%, just shy of the ‘99 29.18% high water mark. Energy slipped to 2.5%, a new record low and far below the 13.14% weight in 2008.  
• Tesla, not even a member of the S&P 500, surpassed Toyota in July as the world’s largest global automobile company (by market cap).  
• July saw an interesting rotation of market internals with the largest 3-day outperformance for value over growth since May of 2001. Tech stocks can’t lead the market forever.

Economic Release Highlights

• July’s Q2 U.S. GDP report registered a record -9.5% QoQ and -32.9% YoY in what the IMF has coined “The Great Lockdown”.
• The July jobs report was solid at 1.76mm (1.675mm expected) and the unemployment rate falling to 10.2%.  U-6 under-employment rate fell to 16.5% and participation stalled out at 61.4%.
• Personal income fell 1.1% in June (after -4.4% in May) but consumer spending increased +5.6% on the month thanks to government stimulus.  
• July PMI (50.9a vs 51.3e) and ISM (58.1a vs 55e) manufacturing indices both marked improvement over the prior months, now both officially residing in expansionary territory.
• July PMI (50.0a vs 49.6e) and ISM (54.2a vs 53.5e) services indices both marked improvement over the prior months, now both officially residing in expansionary territory.
• All but three of eleven major global services and manufacturing PMIs moved back into expansionary territory.
• June existing home sales of 4.72mm (+21% MoM) showed improvement and was in line with expectations.  New home sales figures were very impressive and crushed expectations. 

Vladimir Lenin is not someone we would generally quote but this one has a “Yogi Berra” quality and timeliness that we couldn’t resist as he once said, “There are decades where nothing happens and there are weeks where decades happen.” After record breaking recovery months in April/May, equity markets got into a tug of war in June between two forces, the virus impact on growth and the stimulus response to the virus. The S&P 500 did briefly dip its toe into the green (YTD) in early June but succumbed to some market consolidation amidst a resurgence of coronavirus concerns in the U.S. We expect this tug of war between the coronavirus economy and policy stimulus to continue to churn for the remainder of the summer but remain constructive on the broader global equity market relative to bonds over the intermediate and longer term. Interest rates didn’t budge in June, but credit spreads managed a slight decline during the month with high yield spreads falling from 671 to 644. Commodities continued to recover from early spring and the WTI death spiral in April while the USD fell (-0.82%) for a second consecutive month.

Market Anecdotes

• Global equities rose for a third consecutive month to wrap up their best quarter since 2009. International developed (3.4%) and emerging market stocks (7.4%) outperformed their U.S. counterparts (2.0%).  
• The best performing assets in June were found outside the U.S. Hong Kong (+11%) was the top performing global market. While small caps are down sharply on the year, they were strong performers in June. Mega-cap growth was the best domestic performer for the month.
• U.S. markets got a strong boost in early June on a stunning May jobs report reflecting 2.5mm jobs added and a U3 rate falling from 14.7% to 13.3% (U6 from 22.8% to 21.2%).  June payrolls of 4.8mm delivered another huge upside surprise as well.
• The S&P 500 finished up 21% in the second quarter which is the first time since 1932 a 20% quarterly decline (Q1) was followed by a 20% gain in the following quarter (Q2). 
• An amazing testament to the turnaround rally is seen in the NASDAQ 100 (QQQ) which was up 10% on the year into February, collapsed over 30% on CoVid-19 developments in March, then went on to rally to a 20% YTD gain by mid-July.
• NBER stated the obvious in June by declaring the longest expansion in U.S. history (10yrs 8mo) ended in March of 2020. Activity peaked in February, entered recession in March, and resumed growth again in May – one of the shortest recessions in U.S. history.  
• FactSet reported estimated 2Q earnings is -44.6% which, if met, would mark the largest year-over-year decline in earnings since Q4 2008 (-69.1%).  
• The impact of CoVid-19, police misconduct, mass protests/rioting, and social unrest on the November elections will take time to filter through but clearly introduce material changes from the January 2020 picture on both economic and social fronts.  
• Relaxation of containment measures, lockdown fatigue, and the return of social gatherings made a CoVid-19 resurgence highly likely however, improved treatments, better data, and a lack of social or political will make repeating the lockdown containment measures far less likely.
• BCA projects the U.S. consumer fiscal “cliff” created by the one-time stimulus checks will require close to $1t boost to personal income to prevent falling below February levels, requiring quick action before the end of July to extend the ‘bridge’.   
• While we expect ample DC posturing over the next two weeks, we caution investors that it was a mistake to bail in the face of stimulus uncertainty in March and every time the debt-ceiling issue came to the forefront in the past.
• The Fed was busy in June. They met and kept rate policy steady, noting the balance sheet has grown to $7.165t, up over $3t since March. They expanded the Main Street Lending Program to increase support for small/mid-sized businesses (lowered minimum loan amount, increased maximum loan size, pushed back principal repayment, extending loan term). They began purchasing direct corporate bonds through the SMCCF, which took some time to set up. They extended the PPP loan program deadline and are still working on setting up the PMCCF.
• The ECB pleasantly surprised markets in June by announcing €600 billion of purchases to run at least through June 2021 – expectations were for only €500 billion.

Economic Release Highlights

• After declines in retail sales of -8.7% for March, -16.4% for April, the consensus forecast for May was a rebound to +7.5% but that number was crushed, registering 17.7% MoM growth.
• June’s U.S. PMI indices surged higher from May levels with Services (37.5 to 47.9) and Manufacturing (39.8 to 49.8).
• June’s U.S. ISM indices echoed the PMI trends with Services (45.4 to a 57.1), Manufacturing (43.1 to 52.6), and the overall Composite hitting 56.6, its highest level since February 2019.
• June payrolls of 4.8mm (3.0mm forecasted) followed up May’s shocking upside surprise report of 2.5mm. The unemployment rate dropped to 11.1% from 13.3%.
• June’s PCE report showed income falling less than expected (-4.2% v -6.4%) from April’s 10.5% stimulus surge and consumer spending increasing a record 8.2% after April’s 12.6% decline.
• The NY Fed Weekly Economic Indicator of high frequency economic data has improved ten consecutive weeks now after enduring twelve consecutive weeks of deterioration ending with a low water mark of -11.48 on April 25th.
• Housing market data continued its robust trajectory in June. The NAHB housing market index (58) the crushed consensus call of 44. Weekly mortgage applications increased nine consecutive weeks and sit at their highest levels post GFC. Pending home sales in May increased 44.3%, far in excess of the 11.3% expectation. 

A global trend of reopening economies, improving virus data, and massive stimulus bolstered the view that the bottoming of economic data is behind us which, after the best April (+12.82%) for the S&P 500 since 1987, delivered the best May (+4.76%) since 2009 – the best back to back monthly results since exiting the GFC. Cyclicals joined in the recovery in the latter half of May with industrials (+5.5%) and materials (+7%) posting strong gains. European and Latin American led equities globally while tense U.S.-Sino relations pressured Chinese and Hong Kong markets. Rates didn’t move very much during May, as bond markets priced in lower inflation for longer and persistent low policy rates from the Fed. Commodity markets staged a huge rally on the back of an 87% move in WTI oil and solid returns across most industrial metals while the USD held true to its counter-cyclical nature, falling 0.68% for the month.

Market Anecdotes

• CoVid-19 data (U.S.) continued to improve through May with positive test rates declining from a peak of 21% to 5.4% by month’s end.  Seven-day averages of deaths per day, new cases per day, and hospitalizations all show definitive signs of improvement. 
• Since the CoVid-19 genome was publicly released on January 7th, the global Manhattan Project style race to find a vaccine has yielded 8 therapies already in human trial stages, the fastest therapeutic technology development in history.
• NBER declared an obvious end to the longest expansion in U.S. history at 10 years 8 months, officially entering recession in March. While recessions last an average of 15 months, it is notable that the 1918 Spanish Flu recession was the second shortest on record at 7 months.  
• The Fed balance sheet topped $7t for the first time in May, up over $3t in the past three months. Money supply (M2) has grown 31.3% over 13 weeks. The Fed’s $250b SMCC program, managed by Blackrock, began trading in late May, purchasing individual bonds and fixed income ETFs across investment grade and high yield markets.
• Markets have also benefited dramatically from nearly $3t in U.S. fiscal stimulus spanning unemployment benefits, direct payments to individuals, loans for companies, state/local government Covid-19 support, and public services.  
• State budget shortfalls are expected to reach $765b over the next 3 years, far greater than the $510b shortfall of 2009-20011 and the IMF expects budget advanced economy budget deficits to exceed 10% of GDP in 2020, also significantly higher than the GFC.
• There were 12 global central bank rate moves during the month of May, all of which were rate reductions ranging from 25bps to 100bps. May also saw the EU announce a €750b ($823b) stimulus package of loans ($500b) and grants ($250b) and the EC promoting a support plan for the region’s weaker nations, much to the chagrin of the ‘frugal four’.
• Resilience of the U.S. housing market was evident during the month, helped materially by very supportive technicals and the 30-year mortgage rate hitting a new all-time low of 3.15%.
• Oil markets rallied over 85% in May after posting the worst YTD return on record through month end April (-74%).  Improved outlooks on CoVid-19 related demand destruction, production cuts (in addition to the April cuts) of 1.2mbpd from KSA/Gulf allies, and a KSA/Russia agreement to extend production cuts through July all factored strongly into the rally.  
• May capped off three straight months of record corporate bond issuance and significant U.S. Treasury issuance of $4.5t to fund the fiscal year 2020 deficits.  There are more than enough bonds to go around.

Economic Release Highlights

• May’s jobs report reflected a surprise 2.5mm increase in payrolls and a 13.3% unemployment rate after April posted the worst single month in history (20.5mm jobs lost).
• May’s PCE report showed consumer spending dropping by a record 13.6% in April, missing the -12.9% consensus and followed up a 7% drop in March. 
• Personal income unexpectedly jumped by a record 10.5% (consensus -5.0%) thanks to an unprecedented 160.4% surge in government transfer receipts (unemployment insurance +1.93% and stimulus checks 13.9%). 
• Inflation was non-existent as expected with MoM headline and core PCE Price Index dropping 0.5% and 0.4% respectively, the most since 9/11.  YoY headline and core PCE prices eased to 0.5% and 1.0%, the lowest levels since December 2015
• Economic damage beginning in March took Q1 GDP to -5.0% while Q2 forecast from the Atlanta Fed GDPNow estimate is at -48.5%, all but certain to register as the worst GDP quarter in U.S. history by a landslide.
• May’s PMI (39.8) and ISM (43.1) manufacturing indices improved slightly from April levels but remain deep in contractionary territory.  
• May’s ISM services index rose MoM (41.8 to 45.4), still contractionary territory but tied for the largest MoM increase since September 2017.
• May’s PMI readings for the Eurozone and Japan were 39.5 and 38.4 (manufacturing) and 28.7 and 23.5 (services) both deeper red numbers than the U.S. but beginning to improve as well.
• May’s NAHB Housing Market Indicator confirmed a relatively healthy housing market backdrop, climbing from 30 to 37, the seventh largest monthly increase since 1985.  Housing supply was lowest in 7 years prior to the pandemic followed by -50% drop in April and -30% in May.    
• April’s new home sales registered 623k, well over the consensus estimate of 495k and a very surprising number during a month of record economic declines.
• The May NFIB small business optimism index surprised on the upside, registering 94.4 versus consensus expectation of 92.0.
• After plummeting 30 points in April to 85.7, May’s Conference Board consumer confidence reading edged slightly higher to 86.6.
• UofM consumer sentiment reading for May softened from the preliminary reading to 72.3, down 27.7% from one year ago and the lowest level since October 2008.