COVID-19 Market Update: All Eyes on Economic Data
News of a third vaccine with a 90% effective rate on the first dose of a two-dose regiment helped propel the Dow over the 30,000 mark for the first time. Weaker economic data later in the week slowed indices’ advance, but it remained in positive territory for the week. The TSX gained 2.1% during the week, pushing the index into positive territory (1.8%) year-to-date. The S&P and Nasdaq advanced 2.27% and 2.96% respectively. The broader-based Russell 2000 jumped over 3.89% responding to vaccine optimism and hopes of reopening. Cyclicals stocks, especially energy, continued their bounce adding to the previous week while healthcare, utilities, real estate and consumer staples lagged. Increasing depth and new leadership is usually an indication of a more robust and sustainable market.
Economic news ran contra to market optimism resulting from vaccine hopes. Initial jobless claims jumped to 778,000 from the prior week’s 748,000 and the consensus estimate of 729,000. As COVID cases continue to rise resulting in additional restrictions on businesses, it should be expected new claims will rise as the economy slowly shuts down. A US Census Bureau report states personal income decreased by 0.7% in October, negating September’s gain, while consumer spending rose 0.5%. The University of Michigan’s consumer sentiment for November was adjusted lower at 76.9, the lowest level since August. Additionally, consumer confidence also fell more than consensus. On the positive side, the Census Bureau reported orders for manufactured goods increased 1.3% in October, and September’s new durable goods order number was revised higher to 2.1%. Low mortgage rates and the exodus from city centers kept the housing market strong with sales of new single-family homes seasonally adjusted at an annual rate of 999,000 in October. The median homes prices stood at $330,600 in October.
Despite numerous court challenges in swing states, the emerging political environment remains encouraging with the appointment of Janet Yellen as Treasury Secretary. Her dovish tenure as the Fed Chairman helped boost investor sentiment. Also reports, later denied, of Biden’s transition team’s desire of a more conciliatory tone with Republicans on a fiscal stimulus package added to the shortened week’s calm. Also supportive to the week’s tone was the announcement on Tuesday of the General Services Administration commencing transition preparations. What remains to be seen is the compromise between the more progressive element of the Democrat party, the moderates and party leadership. All indications are a somewhat strained relationship with moderates realizing they may very well have to reach across the aisle to get anything done resulting in compromises unacceptable to either party leadership to this point.
While investor sentiment is focused on the positive developments of a vaccine, little attention is being paid to the consequences of restrictive business practices and the ensuing damage to people’s lives and the economy. We are facing with an ever-increasing bumpy road. Vaccine news aside, many experts are suggesting social distancing and masking will remain until such time as herd immunity is achieved which will require between 60% to 80% of the world’s populations being immune before normalcy is restored. Herd immunity will not occur overnight and will take much longer than many small businesses have to survive. Small business failures are staggering. In a Yelp1 report as at August, 163,735 businesses had closed with the number of permanent closures at 97,966 or 60% of closures. In a recent survey of small businesses (survivors) conducted by CBIZ,2 43% of the respondents reported a significant to severe impact from coronavirus and this survey was taken before the latest round of restrictions. Eighty-five percent of the respondents took advantage of the Payroll Protection Program which has expired. With increasing restrictions resulting from a growing number of COVID cases, we will continue to see increase pressure on small business survival. The strength of small businesses is a key driver of new job growth and robustness of any economy.
Economic data in the coming months will determine the sustainability of market advances and the soundness of the underlying economy.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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