Macro Perspective

The US Treasury Secretary decided against extending the Federal Reserve’s (Fed’s) emergency lending facilities supported with funding under the Coronavirus Aid, Relief and Economic Assistance Act designed to ease the virus-driven economic downturn beyond the end of the year and asked the Fed to return unspent funds for such facilities. While the incoming Treasury secretary will be able to restart these programs, he or she would be doing so with meaningfully less of a backstop to ensure ample liquidity in credit markets and support equity markets. This is likely to add to financial market volatility.

Retail sales growth softened during October but remains 5.7% greater on a year-over-year basis. While’s Prime Day sales may have added only a temporary boost, consumers’ balance sheets actually remain quite healthy, with US disposable personal income per capita 4.2% greater than February levels. Meanwhile, housing data continue to notch all-time highs against a backdrop of low mortgage rates and increasing desire for suburban housing.

Equity Markets

Domestic equities repeated the previous week’s performance, as smaller capitalization and value stocks drove markets higher on additional COVID-19 vaccine progress. Since the S&P 500® Growth Index reached its all-time high on September 2, the Russell 2000® Growth Index is outperforming by more than 12%.

Sell-side price targets for year-end 2021 compiled by Bloomberg reflect the median forecast is expecting a 10% growth rate compared to year-end 2020 price targets, which interestingly are approximately 4% below current levels. The median earnings-per-share forecast is $166, suggesting expectations of significant earnings growth to offset multiple compression in the coming year.

The MSCI World ex USA Index posted a fifth week of outperformance over domestic equities. Once again cyclical sectors drove the gains, led by Financials, Industrials, Consumer Discretionary, and Energy. Health Care and Consumer Staples names were the only drags on the benchmark. Strong gains in technology names in Taiwan and South Korea powered the MSCI Emerging Markets Index to outperformance over domestic equities. In addition, cyclical names in the Financials, Materials, and Energy sectors advanced on potential for better longer-term growth prospects in conjunction with favorable vaccine developments.

Fixed Income Markets

Fixed income performance exhibited broad strength last week as 10- and 30-year Treasury yields declined further from recent six-month highs, benefitting longer-duration bonds. Domestic credit sectors outperformed as spreads continued to grind lower in high grade, high yield, and municipal bond markets.

Through November 20, a record high $17.1 trillion in global bonds were “paying” negative yields, reflecting a backdrop of extremely low (if not negative) interest rates and China’s first sovereign-bond sale with a negative yield.

Chart of the Week

Higher-frequency data have started to reflect ongoing new restrictions to curb the spread of the virus. Measures such as Google mobility data, hotel occupancy, and TSA airport travel volume have collectively moved lower over the past few weeks. Additionally, OpenTable data, one of the more sensitive gauges of new shutdown restrictions, have nearly halved in just the last month across select major cities. This is a stark reminder that despite building optimism from favorable vaccine news, near-term hurdles remain to successfully reopen the economy.

View Chart of the Week on the full report