Commentary provided by John Packs, Senior Investment Officer, AIG Retirement Services
Weekly Market Performance Snapshot (Week ending November 20, 2020 / Year-to-Date)
- Dow Jones Industrial Average®: -0.7% / +2.8%
- S&P 500® Index: -0.8% / +10.1%
- NASDAQ Composite® Index: +0.2% / +32.1%
- Russell 2000® Index: +2.4% / +7.0%
- Best-performing S&P 500 sector this week: Energy, +5.0%
- Weakest-performing S&P 500 sector this week: Utilities, -3.9%
- 10-year U.S. Treasury note yield on November 20, 2020: 0.835
- Down 5.8 basis points from 0.893% on November 13, 2020
- Down 109.2 basis points from 1.92% on December 31, 2019
Past performance is not a guarantee of future results.
Markets weigh vaccine optimism against virus concerns
After a rally on Monday—during which the Dow set a new closing high and nearly surpassed the 30,000 mark for the first time ever—equity markets pulled back over the course of the week. Investors showed concern about the ongoing coronavirus surge and growing restrictions on economic activity imposed in cities and states. The 10-year Treasury yield ticked down as investors sought safety in government bonds (yields move down as prices move up).
- Moderna, Pfizer, and AstraZeneca all reported positive results from vaccine trials during the week. On Friday, Pfizer applied for FDA approval of its vaccine. Distribution could begin in December. Significant logistical challenges remain for any approved vaccine, including manufacturing large numbers of doses, and then shipping, storing, and administering the vaccines.
- Despite the roughly flat weekly performance of equities more broadly, the small-cap Russell 2000 Index set new record highs on Monday and Tuesday and held on for a weekly gain. The rise in small-cap stocks reflects vaccine optimism, as small-caps are economically sensitive stocks, which stand to benefit when the economic recovery is on firmer footing.
- Positive performance by small-caps and other cyclical stocks through the week suggests that the long-awaited rotation toward cyclical and value stocks may be gaining traction.
Near-term economic conditions remain uncertain
While vaccine news has raised hopes for a return to normal economic activity in 2021, the economy in the current quarter (October through December) looks weak amid continuing virus uncertainty.
- Weekly initial jobless claims rose to 742,000, an increase of 31,000 over the previous week. It was the first weekly increase since early October. More than 20 million people are receiving some form of unemployment assistance.
- The latest retail sales figures showed a gain of just 0.3% in October, below analysts’ expectations. It was the smallest monthly increase since the economic recovery began in May.
- The housing market continues to be a bright spot in the economy. October existing-home sales rose 4.3% from September and 26.6% from the prior year. It was the highest seasonally adjusted sales rate since 2006. Ultra-lowinterest rates are a significant factor in the increase.
- Negotiations on additional fiscal stimulus have reportedly resumed, but it’s unclear when (or if) a new support package will be agreed to. An announcement of a stimulus deal would likely lift markets’ spirits, as it would help to mitigate economic pain from the current virus surge and serve as a bridge to a vaccine-aided economy.
- Treasury Secretary Steven Mnuchin announced that he planned to allow several Federal Reserve emergency lending facilities to lapse at the end of the year. While the programs in question have been used sparingly during the pandemic, Fed officials said they would prefer to retain the ability to use all the emergency programs currently at their disposal. Market reaction to Mnuchin’s decision has thus far been muted.
Bifurcation in the retail space continues
The retail sector has been a tale of haves and have-nots this year, as businesses selling essential goods and operating online have gained sales throughout the pandemic, while traditional brick-and-mortar businesses have struggled. Quarterly results released during the week confirmed the trend.
- Target released another strong earnings report, with sales growing more than 20% over the same quarter in the previous year. Online sales were up 155%. In-store sales grew nearly 10%, helped by Target’s ability to offer everything from food to electronics.
- Walmart reported sales growth of 6.4%, lower than the previous two quarters, while e-commerce sales surged 79% in the quarter.
- Macy’s, which is more reliant on sales in physical stores, reported a 20% decline in sales from the previous year, even as it reported online sales growth of 27%.
- As new restrictions on travel and economic activity take hold in many localities, the holiday shopping season is likely to continue the trend of favoring online shopping versus in-person shopping.
- In another example of the growing power of e-commerce, the stock prices of major pharmacy chains such as Walgreens, Rite-Aid, and CVS fell sharply this week after Amazon announced the launch of a pharmacy business that will deliver prescriptions to consumers.
Final thoughts on investors
The rest of 2020 looks to be a time of transition—transition in government, transition in the battle against coronavirus as we look forward to a vaccine, and transition in the market as cyclical stocks begin to gain traction. Times of transition are filled with uncertainty, and uncertainty can potentially breed volatility. Speak with a financial professional about positioning your portfolio for the uncertain period ahead.