us market - November 1, 2020
The week started on a positive note with continuing momentum from a surprisingly upbeat non-farm payroll figure. The Nasdaq composite hit a fresh record high in the beginning of the week while the Dow Jones Industrial Average and the S&P500 were about 6.7% and 4.5% away from their February highs, but the S&P 500 has briefly closed in positive territory for the year. With all eyes focused on the mid-week Fed minutes which comments on the state of the economy and explanation on the monetary policy stance, the markets gyrated heavily into the event and the week closed sharply lower with volatility ensuing. All three indexes lost at least 2% for the week, putting an end to a three-week winning streak. The Nasdaq was down 2.3%, the S&P 500 and DJIA declined by 4.8 and 5.6% respectively.
The Federal Reserve in its statement reiterated its very accommodative stance saying that the Central Bank will likely refrain from raising interest rates until 2022 and will continue the pace of Treasury and Mortgage Backed securities purchases. The Federal Reserve balance sheet has ballooned by over $3 trillion in a matter of 3 months, closing at a total of $7.16 trillion last week. The Fed projected that the unemployment rate would average between 9% and 10% during the last three months of the year. That would be down from 13.3% in May, but still well above the 3.5% level of February. The Federal Reserve Open Market Committee sees the US economy contracting between 4-10% in 2020 and growing somewhere between 1-5% in 2021.The Fed Chairman Powell highlighting the potential long-run damage the virus could inflict on the economy by changing consumer and business behavior, suggested that the road to a complete recovery is very long. One of the main catalysts for the sharp rally in the global equity markets has been the ample liquidity injection by central banks. With many economies still only partially open, the equity markets seems to be running ahead of the fundamentals on the main street, even as threats of a possible second wave of infections are increasing. States like California, Utah, Arizona, North Carolina, Florida, Arkansas and Texas, among others, have all logged rises in confirmed new cases as these states lifted restrictions. New York City, the U.S. area hit hardest by the pandemic, began reopening its economy Monday.
All sectors in the S&P500 closed in the red with the Energy Sector taking the biggest slide of 9.82%. Industrials and Financials sectors both closed over 7.5% for the week. Financials found distaste among investors as a prolonged “zero interest rate” policy was seen to disturb bank profitability.
We at Rasameel have been of the view that a “V-Shaped” recovery, with a relatively short period of declining economic activity, followed by a sharp bounce back to prior levels of growth and spending is very unlikely, and we believe that disruptions to demand and consumer behavioral patterns to be time consuming for adaption.
Safe-haven assets like Treasuries and Gold found a bid. The benchmark 10-yr Treasury bonds yields declined from 0.89% to 0.71%. Bond prices gain when yields decline. Gold climbed from $1688.35 last week to close at $1737.60.
Next week, more information on the strength of the consumer will be evident as Core Retail sales figures for the month of May will be released on Tuesday. Also, closely watched will be the Philadelphia Fed Manufacturing Index for more color on manufacturing activity.
