Market Commentary – October 2020

Stocks fell for the second consecutive month in October as rising COVID-19 cases and related deaths shunted signs of an economic rebound. The month began on an upswing with both the Nasdaq and S&P 500 posting their best weekly gains since July, and the Dow finally pushed ahead of its 2019 year-end value. Unfortunately, reported virus cases began to soar by midmonth, both here and in Europe. Word that Great Britain may impose stricter lockdowns hit stocks there and eventually in the United States. Nevertheless, there are signs that the economy is gradually picking up steam. Gross domestic product rebounded in the third quarter and job growth continued in September, albeit far below its August pace. Several companies reported strong earnings in the third quarter. Personal income inched ahead by 0.9% and consumer spending rose 1.0%. Inflation remained well below the Federal Reserve's target of 2.0%, keeping prices for consumer goods and services down. Interest rates for loans and mortgages remain low, helping the housing sector to surge.

Another reason for investor trepidation was the ongoing debate over whether and when another round of fiscal stimulus would be in the offing. Throughout the month, there were indications that some aid would be forthcoming before the November election. However, that does not appear to be in the cards.

By the end of the month, only the small caps of the Russell 2000 were able to forge ahead in value. The remaining indexes suffered monthly losses, led by the Dow, followed by the S&P 500, the Nasdaq, and the Global Dow. Year to date, the Nasdaq is 21.6% ahead of last year's pace, followed by the S&P 500, which is up 1.2%. The remaining indexes are at least 7.0% off their respective 2019 closing values.

*Chart reflects price changes, not total return

Last Month's Economic News

• US job gains slowed in September by more than half from the prior month, missing forecasts and suggesting the economic recovery is downshifting as many Americans and businesses struggle without a COVID-19 vaccine or fresh government aid. Nonfarm payrolls increased by 661,000 following an upwardly revised 1.49 million advance in August, according to data from the Labor Department. That compared with estimates of a gain of 859,000. The unemployment rate fell by more than forecast, dropping 0.5 percentage point to 7.9%, though the labor-force participation rate declined by 0.3 point to 61.4%, with declines particularly pronounced among women. One of the key drivers of September’s payrolls figure was a 280,500 seasonally-adjusted drop in employment in state and local education, as budget cuts along with a switch to virtual education in many districts weighed on hiring. Federal government employment fell by 34,000 in September, reflecting a drop in temporary Census workers in the month, after hiring of such employees gave a 238,000 boost in August.
• In contrast to the second-quarter gross domestic product, which fell 31.4%, the initial estimate for the third quarter shows the economy advanced at an annual rate of 33.1%. While this estimate is based on incomplete information, it does reflect 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 40.7% in the third quarter in contrast to a 33.2% decline in the second quarter. Nonresidential (business) investment vaulted 20.3% (-27.2% in the second quarter), residential investment soared up 59.3% after falling 35.6% in the prior quarter. Exports advanced 59.7% (-64.4% in the second quarter), and imports increased 91.1% (-54.1% in the second quarter). Federal nondefense government expenditures decreased 18.1% in the third quarter as federal stimulus payments and aid lessened.
• According to the Personal Income and Outlays report for September, personal income and disposable personal income each increased 0.9% after decreasing 2.5% and 2.9%, respectively, in August. Consumer spending increased in September, climbing 1.4% for the month following a 1.0% advance in August. Inflation remained somewhat muted as consumer prices inched ahead by 0.2% in September after increasing 0.3% in August. Consumer prices have increased by a mere 1.4% over the last 12 months.
• The housing sector returned mixed results in September. Sales of existing homes jumped 9.4% after climbing 2.4% in August. Over the 12 months ended in September, existing home sales are up nearly 21%. The median existing-home price in September was $311,800 ($310,600 in August). Unsold inventory of existing homes represents a 2.7-month supply at the current sales pace, a record low. Sales of existing single-family homes increased 9.7% in September following a 1.7% jump in August. Over the last 12 months, sales of existing single-family homes are up 21.8%. The median existing single-family home price was $316,200 in September, up from $315,000 in August.
• While existing home sales continued to increase, new home sales slowed in September for the first time in five months. After climbing 4.5% in August, sales of new single-family homes fell in September, decreasing 3.5% for the month. The median sales price of new houses sold in September was $326,800 ($312,800 in August). The September average sales price was $405,400 ($369,000 in August). The inventory of new single-family homes for sale in September represents a supply of 3.6 months at the current sales pace, up from the August estimate of 3.3 months.
• Total industrial production fell 0.6% in September after four consecutive months of gains. Although industrial production has recovered more than half of its February to April decline, the September reading was still 7.1% below its pre-pandemic February level. Manufacturing output slowed in September, decreasing 0.3% after advancing 1.0% in August. Manufacturing output is 6.4% below February's level. The output of utilities dropped 5.6%, as demand for air conditioning fell by more than usual in September. Mining production increased 1.7% in September; even so, it was 14.8% below a year earlier. Most major industries posted decreases in September. Consumer goods fell 1.6%. Production of business equipment dropped 1.2%. The output of utilities moved down 0.4%. Overall, the level of total industrial production was 7.3% lower in September than it was a year earlier.
• For the fifth consecutive month, new orders for durable goods increased in September, climbing 1.9% following a 0.4% jump in August. Despite the trend of monthly increases, new orders for manufactured durable goods are 10.1% lower than a year ago. Excluding transportation, new orders increased 0.8% in September. Excluding defense, new orders increased 3.4%. Transportation equipment, up four of the last five months, led the September increase in new orders, advancing 4.1%. Nondefense new orders for capital goods in September increased 10.4%.
• Prices for U.S. imports rose 0.3% in September, following a 1.0% jump in August. Despite the recent increases, overall import prices declined 1.1% for the year ended in September. Import fuel prices fell 2.9% in September following a 3.9% increase in August. In contrast, natural gas prices advanced 26.2% in September, the largest increase since the prices advanced 44.3% in November 2019. Prices for nonfuel imports advanced 0.6% in September, following a 0.7% rise in August. Rising prices for nonfuel industrial supplies and materials; foods, feeds, and beverages; automotive vehicles; consumer goods; and capital goods contributed to the September advance in nonfuel import prices. Prices for U.S. exports rose 0.6% in September, after advancing 0.5% in August. In September, higher prices for both agricultural and nonagricultural exports contributed to the overall rise. Despite the recent upward trend, prices for U.S. exports fell 1.8% over the past year.

International

• Global markets saw stocks sink as COVID-19 cases surged and lockdowns loomed. The pandemic resurgence is also having a negative impact on the European economy. Eurozone purchasing managers' service index sank from 48.0 in September to 46.2 in October indicating a significant decline in the services sector. However, on a positive note, retail sales in the United Kingdom rose 1.5% in September. China seems to be on the road to recovery. China's third-quarter gross domestic product was up 4.9% from a year earlier. In the market, the UK's FTSE 100 dropped 3.3% in October, while China's SZSE Component index advanced 4.0%.

November is sure to bring with it plenty of developments, particularly in light of the presidential election. Economic growth has been mixed, with some indicators, such as housing and industrial production, picking up steam, while others, like consumer prices and employment, have been slower to respond. The economy should continue to grow this month, but how the election impacts that growth remains to be seen.