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Vantage Point: The fear of fear itself

The Roman alphabet has outlived its usefulness – at least as far as labelling the economic recovery is concerned. Having spent six months talking about ‘V’, ‘U’, ‘W’, ‘L’ and even ‘K’-shaped paths, for this edition we have decided to ditch the letters and go back to a simpler classification. The course of the disease remains the single most important determinant of the kind of economic recovery we get, but we now think a simple ‘good’ or ‘bad’ classification covers everything we need to discuss. We cover this reassessment and its impact on markets and investment conclusions in our new Vantage Point.

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Weekly Market Roundup

November 30, 2020

Start your week off right with our market snapshot from the Global Economics and Investment Analysis Group.

WHAT HAPPENED

Global stocks gained 2.4% in the latest week bringing the MTD return to 13.4% which would be the highest in history. The strong performance was widespread with the MSCI EAFE up 2.2% (17.0% MTD), MSCI EM 1.8% (11.6% MTD), and the S&P 500 2.3% (11.4% MTD). In the US, small caps (3.9%; 20.7% MTD) and tech (NASDAQ: 3.0%; 12.0% MTD) outperformed. Oil climbed 8.0% on higher risk-on sentiment while gold fell -3.2%. Credit spreads were lower, rates were mixed, and the USD fell -0.7% bringing the YTD fall to -4.8%.
Weekly jobless claims (778K) increased and were higher than expected, highlighting the labor market’s vulnerability to the spread of Covid-19.
US Conference Board consumer confidence has been unable to maintain upward momentum. The index missed estimates, fell to 96.1 from 100.9, and is still far from February’s 132.6.
The US Markit manufacturing PMI increased 3.3 to 56.7 and services improved to 57.7. The monthly expansion in manufacturing was the strongest in 6 years and the best since March 2015 for services.
Highlighting the potential need for further stimulus, US personal income fell -0.7% m/m. The latest level is still above February’s by 3.2%.
US core PCE inflation was 0.2% lower to 1.4% y/y in October.
UK PMIs were better than expected but services moved back into contraction. Manufacturing gained 1.5 to 55.2 while services fell to 45.8 from 51.4.
Fed meeting minutes highlighted that the economy had recovered substantially during the summer but was still far from pre-Covid levels. Elevated cases in Covid-19 and some signs of slowing labor market progress were a concern.
Eurozone PMIs declined but the fall was worse than expected for services. Manufacturing PMI fell -1.2 to 53.6 remaining in expansion but services dropped from 46.9 to 41.3. Services have weakened each month since July.
Japan inflation was -0.7% y/y in November, the lowest since 2012.
India Q3 GDP was -7.5% y/y but better than expected and Q2’s -23.9%.

Major advanced economies yield curves (10-year yields – 2-year yields)

WHAT'S AHEAD

China Caixin Manufacturing PMI (Monday)
US ISM Manufacturing PMI (Tuesday)
Eurozone Inflation (Tuesday)
China Caixin Services PMI (Wednesday)
Eurozone Retail Sales (Thursday)
US ISM Services Index (Thursday)
US Jobs Report (Friday)

VIEW SNAPSHOT

Monthly Market Roundup

October 2020

Progress Continues, Risks Remain

Global stocks declined -3.2% in September, the first loss since March, bringing the YTD return to 1.8%.
Big tech and growth stocks, having led market performance YTD, led the fall. Risk-off sentiment helped drive safe-haven government bond yields lower and a 1.9% advance in the US dollar.
Global economic improvement continues but risks remain to the downside and further fiscal stimulus will likely be needed in the US.
A rise in Covid cases in certain areas around the world is a cause for concern, but it is too soon to gauge the potential economic impact, as full lockdowns seen in March and April will likely not be utilized again.
Signs of slowing labor market progress and rising structural unemployment remain a key risk.

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September 2020

Global stocks gained further in August and returned 6.2%, the best August in 32 years, bringing the YTD performance to 5.1% after surpassing the prior February peak.

Back to New Highs
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August 2020

Global stocks gained 5.3% in July bringing the YTD loss to only -1.0%.

Stocks Gain Despite Signs of Slowing Recovery
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Points of View

What’s priced into markets?

Inflation: Is It Coming Back?

Probably not in a big way, but if it were to it would change the investment landscape completely.

Interest Rates

Short term interest rates reached all-time lows in the US in May, rebounding only marginally since then. At face value, markets appear to be pricing in a significant probability of negative rates in the US. We see this scenario as unlikely.