Economic Update 10-04-2021
- Economic data for the week included a slight revision higher in Q2 U.S. GDP growth, stronger durable goods orders and ISM manufacturing sentiment, as well as stronger housing price and sales data. Jobless claims and consumer sentiment were mixed.
- Global equity markets fell back again last week, with continued investor concerns about inflation, rising interest rates, and an upcoming treasury debt ceiling. Bonds declined as well, in keeping with higher rates. Commodities continued to see gains, on the back of spiking petroleum prices.
U.S. stocks fell back again last week, with the tech-focused Nasdaq experiencing its worst single day since March. However, the recently market volatility overall has not resulted in a net drawdown of even -5% yet. Optimistic news over a Merck treatment for Covid patients boosted sentiment by the end of the week. By sector, energy was the only positive performer, rising over 5% on continued strength in oil and gas prices. Health care and technology were the lagging groups, each falling over -3%. Real estate also declined -2%, in line with rising interest rates.
Tuesday’s decline was led by a ‘spike’ in Treasury interest rates, in no small part by Fed Chair Powell’s Senate testimony, which noted that inflation is likely to stay elevated for the coming months. The end of the U.S. government fiscal year on Sept. 30 and potential for a federal shutdown added to concerns, as has the estimated Oct. 18 (or so) date where the government essentially runs out of money. The debt ceiling debate being pushed down the road has been identified by a variety of Washington strategists as the most pressing and concerning issue in recent months, even surpassing the pandemic as of late. In fact, echoing ideas from past experiences, Congress has considered minting a high-value commemorative coin (such as a $1 tril. platinum variety) to swap with the Federal Reserve for cash assets. However, such an idea has remained controversial.
It might be interesting to note that despite the seemingly unprecedented nature of a technical default on U.S. debt, it’s happened before, although not well-publicized. It could also be argued external debt defaults occurred in 1790 and during the Great Depression in 1933. In April-May 1979, redemptions on maturing T-bills were held up by high volumes by small investors, a mechanical breakdown of check-processing systems (remember, these were times of ‘manual’ processing of securities and high interest due to double-digit interest rates), but also a Congressional failure to raise the debt ceiling. So, these political issues over debt have hovered over the treasury function for decades. So, while perhaps the semantics and details could be debated, it wouldn’t be unprecedented. But the effects would be painful to the economy.
It’s not a surprise to many investors that rapid interest rate increases (such as those in the 2-standard deviation variety, at least on a monthly basis) are not absorbed well by the stock market. Then again, these can be followed by rate reversals (particularly if a ‘flight to safety’ accompanies a further equity downturn). An underlying concern is a potential reappearance of ‘stagflation’, which characterized the 1970s, but which many of today’s investors have not lived through. This remains one of the primary intermediate-term concerns, although inflation caused by supply/logistical issues appears more ‘solvable’ than the inflation psychology-fueled episodes of the past; because of that, officials are watchful of a new inflation expectation psychology taking hold.
Foreign stocks declined to a similar degree as U.S. equities, with concerns over peaking economic growth and rising inflation abroad as well. German inflation ticked up to 4.1%, a nearly three-decade high, and 3.4% in the Eurozone on a trailing 12-month basis (however core only ticked up to 1.9%). After inflation in Europe having lagged that of the U.S., recent readings look to be pressing yields higher, which also pressures equities. Additionally, several U.K. energy firms have gone out of business over the past two weeks, due to rising gas prices and supply issues.
The Evergrande situation in China appears to be improving in some respects, with the government pushing several state-owned enterprises to absorb a percentage of the firm’s problems. While the idea of this being a ‘Lehman moment’ looks less directly likely, the domestic resources needed to absorb the problem could weigh on Chinese growth further. The government’s regulatory crackdown has continued, with toughened restrictions on cryptocurrencies, with bans on mining and trading. This put a damper on global crypto exchanges, and sentiment around the industry in general, due to China’s sheer size in those markets.
U.S. bonds were hampered by the earlier-mentioned rising treasury yields. These higher yields, though, are attractive on a global basis, which has exacerbated the stronger U.S. dollar. Treasuries outperformed corporates, with widened spreads. Foreign bonds lost nearly a percent, due to rate and currency influences.
Commodities continued their gains during the week, led by energy, with industrial metals the only negative sector. The price of crude oil rose by over 2% to just under $76/barrel, while natural gas rose another 8% last week (55% over the past three months). Most newsworthy, gasoline shortages in the U.K. have brought back images of gas lines from the early 1970s. An upcoming OPEC meeting will be addressing the issue, although hoped-for outcome of higher production is far from assured.
|
Period ending 10/1/2021 |
1 Week (%) |
YTD (%) |
|
DJIA |
-1.36 |
13.72 |
|
S&P 500 |
-2.19 |
17.26 |
|
NASDAQ |
-3.19 |
13.58 |
|
Russell 2000 |
-0.24 |
14.31 |
|
MSCI-EAFE |
-3.14 |
7.52 |
|
MSCI-EM |
-1.41 |
-1.76 |
|
BBgBarc U.S. Aggregate |
-0.12 |
-1.28 |
|
U.S. Treasury Yields |
3 Mo. |
2 Yr. |
5 Yr. |
10 Yr. |
30 Yr. |
|
12/31/2020 |
0.09 |
0.13 |
0.36 |
0.93 |
1.65 |
|
9/24/2021 |
0.03 |
0.29 |
0.97 |
1.47 |
1.99 |
|
10/1/2021 |
0.04 |
0.27 |
0.93 |
1.48 |
2.04 |
Sources: LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.
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