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Market Commentary for the week ending October 16th, 2020
- Big banks kicked off third quarter earnings season reporting overall disappointing results.
- Consumers continue to spend with retail sales gaining again and persisting at record levels.
- Stocks in the United Kingdom underperformed as investors react to a debt-rating cut.
Retails Sales Breakdown
Retail Sales jumped +1.9% in September, more than tripling August’s gain, and topping economists’ forecasts. This adds to a string of reports that have shown the resilience of consumer spending. As many people know though, the pandemic has resulted in some components of spending doing exceedingly well while others have suffered continued steep declines.
The following graph shows a breakdown of the retail sales components click here to access more details. Motor vehicles and vehicle parts are the largest component accounting for 20.2% of total sales while sporting goods stores are only 1.3%.
The following graph shows the change in retail sales in 2020 as compared to the year before. Overall total sales are higher but, as noted before, there have been some big winners and some big losers. The good news is that some of the biggest winners are some of the larger components of sales such as Building Materials and Supplies representing 7.2% of total sales and up +12.8% compared to 2019. Food and Beverage as well as Nonstore Retailers, or online sales, are also large and up big for the year. Clothing sales have fallen the most, down -32.6% for the year, but only account for 2.8% of total sales.
Although retail sales changes have been uneven across categories, consumers have simply shifted how the spend and continue to do so at a record pace which is helping the overall economy. Economists are optimistic the upcoming holiday shopping season will be strong to close at the year.
This Week’s Performance Highlights
Stocks in the U.S. whipsawed around during the week as investors reacted to various headlines but closed little changed. Some of the key headlines included President Trump’s recovery from COVID reported on Monday fueling a market rally, the kickoff of earnings season on Tuesday, disappointing jobless claims numbers (see below) on Thursday initially driving the market lower, and stronger than expected retail sales fueling an early day rally on Friday.
- At the close of the week, large U.S. stocks as measured by the S&P 500 gained +0.2% while the Dow Industrials were higher by +0.1% and the NASDAQ Composite outperformed gaining +0.8%.
- The performance among various sectors for the week was relatively narrow with energy stocks performing the worst down -2.0%, adding to their year’s massive -47.0% loss, while industrials gained +1.1%.
- After posting a huge +6.4% gain in the prior week, small U.S. stocks retreated by just a fraction in the most recent down -0.2%. Year-to-date they remain in negative territory off -0.9% compared to a gain of +9.5% for large U.S. stocks in 2020.
The biggest banks in the U.S. reported earnings kicking off the third quarter season. Overall the results disappointed investors, as shown in the accompanying table, with stocks generally falling for the week adding to deep losses in 2020. The low interest rate environment has made it tough environment for banks. Not all financial stocks suffered though with Morgan Stanley (MS), a big brokerage firm, and BlackRock (BLK), a big asset manager, seeing their stocks rise both for the week and year-to-date.
- International stocks were lower across the board with developed country markets falling an average of -1.4% as concerns once again rise regarding outbreaks of COVID-19. One of the biggest losers was the United Kingdom, down -2.7%, further impacted by a downgrade of its debt by a major rating agency.
- International emerging markets were lower as well but only off -0.6% for the week. A couple of bigger losers were Hong Kong and Thailand, down -2.2% and -3.7% respectively, while China’s market bucked the trend posting a gain of +2.0%.
- Real estate stocks continue to struggle falling -3.5% for the week and now down by nearly -20% once gain for 2020. The other two alternative asset classes provided little help to a diversified portfolio this week with gold down -1.5% and commodity prices were unchanged.
- Bond prices inched higher by +0.2%. Corporate bonds and U.S. treasuries were higher while riskier high-yield bonds posted a loss of -0.4%.
See the above feature story for information on September’s retail sales.
Inflation continues to be of little concern with consumer prices, measured by the Consumer Price Index (CPI), inching higher at the slowest pace in 4 months up just +0.2% in September. The one outlier for the month was a +6.9% jump in the price of used vehicles. This was the biggest monthly increase in 51 years likely fueled by fewer people using public transportation due to COVID-19.
As the accompany graph shows, year-over-year overall consumer prices are up just +1.4% (“All Items”). Used vehicles have seen the biggest price jump of any category during the past year while the price of energy, apparel and transportation services have fallen.
The Producer Price Index (PPI), a measure of wholesale prices, jumped a more-than-expected +0.4%. Economists believe this is just prices returning to more normal levels following big declines during the onset of the pandemic. Year-over-year prices are up just +0.4%.
Industrials production disappointed in September with activity falling by -0.6% versus economists’ estimates of +0.4% and a gain in the prior month. Two of the three components declined, manufacturing and utilities, down -0.3% and -5.6% respectively. A drop in auto production was the biggest drag on manufacturing. Mining activity increased by +1.7% falling a drop of -2.4% the month before. Overall industrial production remains -7.1% below pre-pandemic levels and is expected to struggle with gains going forward.
The most recent week’s report of jobless claims data was mixed with initial (new) claims via state programs rising unexpectedly to 898,000 and well above estimates of 825,000. Furthermore, there were an additional 372,891 new claims filed under the temporary federal program. This combined total was slightly below the prior week’s total. Continuing claims, the total number of people receiving benefits, fell at both the state and federal levels as well but it is unclear if this is due to people going back to work or simply the expiration of benefits (they are no longer eligible).
One issue with all of the claims data is that California stopped reporting numbers 3 weeks as it works through a backlog of applications. Given that the state accounts for 20% to 30% of total jobless claims, there could be some big revisions to the total numbers once they catch up.
Upcoming Economic Reports
- Housing Starts
- Existing Home Sales
- Jobless Claims
- Leading Economic Indicators