Market Commentary – November 2020

Despite a downturn on the last day of the month, stocks rebounded impressively in November from a moribund performance in October. Several of the benchmark indexes reached record highs during November as investors shifted slightly from tech stocks to shares influenced by economic cycles. While the presidential election, COVID-19, and additional fiscal stimulus dominated the news throughout the month, stocks seemed immune. Instead, investors pinned their hopes on the development of a virus vaccine and a quick economic recovery.

Gross domestic product rebounded in the third quarter and job growth continued. Personal income and consumer spending continued to climb. Inflation remained muted and below the Federal Reserve's 2.0% target. Sales of existing homes advanced, while new home sales lagged. The Dow enjoyed its best month since 1987, and the small caps of the Russell 2000 surged ahead by nearly 20.0%. In fact, each of the benchmark indexes posted double-digit monthly gains. Among market sectors, energy, financials, industrials, and materials surged. Communication services and information technology posted moderate gains, and utilities fell.

Year to date, each of the indexes listed here is ahead of its respective 2019 closing value. The Nasdaq is 35.96% ahead of last year's pace, followed by the S&P 500, the Russell 2000, the Dow, and the Global Dow.

*Chart reflects price changes, not total return

Last Month's Economic News

• Employment increased by 638,000 in October after adding 661,000 new jobs in September. Employment has increased for six consecutive months, but is below its February level by 10.1 million, or 5.5%. Notable job gains occurred in leisure and hospitality, professional and business services, retail trade, and construction. Employment in government declined. These improvements in the labor market reflected the continued resumption of economic activity that had been curtailed due to the COVID-19 pandemic and efforts to contain it. The unemployment rate declined by 1.0 percentage point to 6.9%, and the number of unemployed persons fell by 1.5 million to 11.1 million. 15.1 million persons reported that they had been unable to work because their employer closed or lost business due to the pandemic. This figure is down from 19.4 million in September. Average hourly earnings in October rose by $0.04 to $29.50. Average hourly earnings increased by 4.5% over the last 12 months ended in October. The average work week was unchanged from September at 34.8 hours in October. The labor participation rate increased 0.3 percentage point to 61.7%. The employment-population ratio increased 0.8 percentage point to 57.4%, but is 3.7 percentage points lower than in February.
• The Federal Open Market Committee (FOMC) met in early November. In its official statement following that meeting, the FOMC noted that while the COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world, economic activity and employment have continued to recover but remain well below their levels at the beginning of the year. The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. The Committee expects to maintain an accommodative monetary policy stance until maximum employment and 2.0% inflation are achieved over the longer run. In lieu thereof, the FOMC decided to keep the target range for the federal funds rate at 0.0% to 0.25%.
• In contrast to the second-quarter gross domestic product, which fell 31.4%, the second estimate for the third quarter shows the economy advanced at an annual rate of 33.1%, unchanged from the first estimate. The reversal in economic growth reflects the ongoing efforts to reopen businesses and resume activities that were postponed or restricted due to the COVID-19 pandemic. Consumer spending, as measured by personal consumption expenditures, increased 40.6% in the third quarter, in contrast to a 33.2% decline in the second quarter. Nonresidential (business) investment vaulted 21.8% (-27.2% in the second quarter); residential investment soared 62.3% after falling 35.6% in the prior quarter. Exports advanced 60.5% (-64.4% in the second quarter), and imports increased 93.1% (-54.1% in the second quarter). Federal nondefense government expenditures decreased 18.1% in the third quarter as federal stimulus payments and aid lessened.
• The Consumer Price Index was unchanged in October after climbing 0.2% in September. Over the last 12 months ended in October, consumer prices are up 1.2%. Component indexes were mixed, with many offsetting increases and decreases. The food index advanced 0.2%, energy inched up 0.1%, and new vehicles moved up 0.4%. Apparel fell 1.2%, used cars and trucks dropped 0.1%, and medical care commodities fell 0.8%.
• The housing sector returned mixed results in October. Sales of existing homes advanced for the fifth consecutive month, climbing 4.3% after increasing 9.4% in September. Over the 12 months ended in October, existing home sales are up nearly 26.6%. The median existing-home price was $313,000 in October ($311,800 in September). Unsold inventory of existing homes represents a 2.5-month supply at the current sales pace, a record low. Sales of existing single-family homes increased 4.1% in October following a 9.7% jump in September. Over the last 12 months, sales of existing single-family homes are up 25.9%. The median existing single-family home price was $317,700 in October, up from $316,200 in September.
• Total industrial production rose 1.1% in October after falling 0.6% in September. Although industrial production has recovered most of its February to April decline, output in October was still 5.6% below its pre-pandemic February level. After edging up 0.1% in September, manufacturing output increased 1.0% in October. The output of utilities rose 3.9%, while the output at mines declined 0.6% to a level that was 14.4% below its year-earlier reading. Most major industries reversed course from September, posting increases in October. Consumer goods rose 0.8%. Production of business equipment increased 0.6%. Production of nonindustrial supplies advanced 2.0% in October after falling 0.2% in September. Overall, the level of total industrial production was 5.3% lower in October than it was a year earlier.
• For the sixth consecutive month, new orders for durable goods increased in October, climbing 1.3% following a 1.9% jump in September. Despite the trend of monthly increases, new orders for manufactured durable goods were 9.1% lower than a year ago. Excluding transportation, new orders increased 1.3% in October. Excluding defense, new orders increased 0.2%. Defense and nondefense aircraft and parts led the October increase in new orders, advancing 79.1% and 38.8%, respectively. Nondefense new orders for capital goods fell 0.2% in October after increasing 11.5% in September.
• The Conference Board Consumer Confidence Index® declined in November for the second consecutive month. The index stands at 96.1, down from 101.4 in October. The Present Situation Index, based on consumers' assessment of current business and labor market conditions, decreased slightly from 106.2 to 105.9. The Expectations Index, which is based on consumers' short-term outlook for income, business, and labor market conditions, declined from 98.2 in October to 89.5 in November.
• International Markets: China's factory production expanded at its fastest rate in three years, a further sign of the country's economic recovery from the pandemic. Global markets also enjoyed a solid November, with European shares climbing for four consecutive weeks, buoyed by positive vaccine developments. The STOXX Europe 600 Index and Germany's DAX Performance Index each rose nearly 13% on the month. These gains came despite several European nations, including Germany and the United Kingdom, tightening COVID-19 restrictions.

Eye on the Month Ahead

The last month of the year ends a most tumultuous 2020, as the country and the world continue to recover from the effects of the COVID-19 virus. One or more vaccines should be nearing availability in the early part of 2021. The job market should trend upward, unemployment should wane, industrial production should increase, and the economy should stabilize.