August – September 2020

Stephen Zielinski

U.S. Economic and Market Highlights

The Economy:

  • Economic news released over the last month varied from mixed to positive, compared to previous months since the outbreak of the COVID-19 pandemic.
  • The unemployment rate in the U.S. fell to 7.9% in September from 8.4% in August. In the E.U. the unemployment rate was 8.1% in August (not yet reported for September).
  • Consumer confidence rose and factory goods orders increased as manufacturing activities continued its recovery.
  • In the U.S., home sales surged to their highest level in nearly 14 years and Federal Reserve officials upgraded their outlook on the economic recovery with an annualized growth estimate of negative 3.7% and an unemployment rate to 7.6% for the full year 2020.
  • Despite the good news, many companies and individuals are still suffering from the economic effects of the pandemic.
  • The prospects of a second wave create a lot of uncertainty. A new round of more national lockdowns could have a serious impact on the labor market and economy again.
  • Some large companies recently announced plans for major layoffs, especially in the hard-hit industry sectors such as travel, leisure, airlines, and oil & gas.
  • Euro area annual inflation is expected to be negative 0.3% in September versus a positive 1.3% annualized rate in the U.S.
  • Lawmakers in many economically developed countries are working on new stimulus bills to include more funding to support companies, workers, and those who have been laid off.
  • The recovery for emerging market economies is expected to be slower because of fewer government resources and programs.
  • The Long-term US GDP growth rate is forecast to be 1.6% per year over the next 30 years, down from its initial projection of 1.9% last year, largely due to an increased public debt burden from the recent recession. GDP growth rate for the last 60 years was 3.0% per year on average.

Fixed Income:

  • Interest rates in most European countries and in Japan are negative throughout the yield curve. In Switzerland, the overnight rate is -0.90% and the 50-year bond yield is        -0.37%. Banks are limited in their ability to pass along negative rates to depositors. The result is that, as negative rates persist, they decrease bank profitability. In the U.S., Fed policymakers have expressed skepticism about lowering the federal funds rate into negative territory and recently stated that it is not something they are looking at.
  • In September, Treasury yields were virtually unchanged month-over-month in the U.S., with rates ending the month where they started. The implied volatility of Treasury yields fell to an all-time low.
  • Investment-grade corporate bond issuances (supply) reached a new record high for the month of September, as companies rushed to borrow from investors while interest rates are low, and investors showed a strong appetite for newly issued bonds.

Equities:

  • The S&P 500 was down 3.9% in September after hitting a record high early in the month, ending the upward trend started in April 2020. The third quarter was up 8.93% despite September’s decline. (See the Market Tracker below.)
  • Stock performance was supported by an increase in merger activity in the pharmaceutical and semiconductor industries.
  •  The VIX (volatility index) reflects future uncertainty in the market. The VIX corrected from its spike in March but remains near 27 currently which is above its long-term average of 19.
  • On a price-to-earnings basis, the current equity market is expensive. Valuations change based on different factors depending on fundamentals such as earnings, cash flow, labor, and productivity (internal), GDP growth, interest rates, and inflation (external). But the return for any individual investor depends on at what price the stock was purchased.
  • The lower the purchase price of a stock (relative to the company’s earnings), the higher the likely investment return. There is a clear correlation. When investing at a multiple less than 15X, the average return is 12%. That drops to 7% when investing at a multiple greater than 15X. Today the market is at 27X. In the past, at this level or greater, the average return over the next seven years has been 0%.
  • Investors are expecting continued elevated volatility due to the uncertainty stemming from the ongoing COVID-induced economic recession, President Trump and the First Lady testing positive for COVID-19, contentious U.S.-China relations, and the upcoming U.S. Election.
  • Historically, the economy and stock markets have not been significantly impacted by a change in political leadership. However, political policies can be impactful at a more granular level by creating winners and losers within certain sectors of the economy.

This communication was prepared for informational purposes only and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security/instrument or to participate in any trading strategy. Past performance is not indicative of future results.