by William Henderson, Vice President / Head of Investments
Equity markets were mixed last week as headlines threw bad news after good news. Early in the week, positive COVID-19 vaccine news improved investor sentiment, but rising new cases and increased activity restrictions across states cast concerns on the economic recovery. The potential for a divided U.S. Government which could drag on any new fiscal stimulus is also weighing on the markets. For the week, the Dow Jones Industrial Average returned -0.3%, the Standard & Poor’s 500 Index returned -0.8%, while the NASDAQ returned +0.2%. The benchmark 10-year U.S. Treasury note stood at 0.88% at the end of the week.

As noted above, the short-term market moves are impacted by headline news events. That said, parts of the economy continue to do very well, such as the U.S. housing market. October existing home sales were +4.3% year over year and new starts were +4.9% year over year, both beating economists’ expectations. Further, according to Goldman Sachs, the NAHB housing market index reached a record high of 90 for November. Housing remains a resilient and sturdy foundation of the economic recovery. The American consumer continues to show strong financial wherewithal. According to the Federal Reserve Bank of St. Louis, Real Disposable Personal Income stood at $15.8 trillion in September 2020, up from $15.0 trillion in September 2019. 

Further, Average Hourly Earnings of All Private Employees was $29.50/hour, up from pre-COVID-19 March 2020 at $28.69/hour. Lastly, according to Bloomberg, consumers have used their cash piles to pay down debt and secure record-low mortgage rates due to an ultra-easy Fed policy fueling a steady wave of refinancing. 

The Thanksgiving holiday will give us a shortened work week and potentially quieter trading days. The Christmas shopping season will kick-off with Black Friday this week but what does that mean when the shopper is confined to their home? Watch for online retailing to explode this year with firms that have the logistics for effective online shopping benefiting most. Black Friday could morph into Cyber Friday as working from home collides with closed malls and a consumer flush with cash.  

We have three pharma companies announcing a vaccine: AstraZeneca, Pfizer, and Moderna. The Fed remains on guard to supply as much liquidity and stability needed to fuel the economic recovery. A COVID-weary consumer stands on the sidelines flush with cash but locked down as COVID-19 cases spike. In the short term, the markets continue to waffle on good news/bad news headlines but year-to-date, all three broad indices remain positive: the Dow Jones Industrial Average at +2.5%, the Standard & Poor’s 500 Index at 10.1%, and the NASDAQ at +32.1%. Remain committed to long-term goals, see through the noise and watch the markets prove they are more efficient than the consumer.

by William Henderson, Vice President / Head of Investments
Question: What do you get when you mix $19 trillion of cash with a vaccine for COVID-19 and a divided U.S. Government? Answer: The potential for a seriously bullish market. M2 or the measure of the Money Supply of the United States currently stands at $19 trillion, up from $15 trillion in November 2019. M2 is the sum of all cash held by consumers and companies, plus money market accounts and bank deposits, and all “quasi-cash” balances such as Eurodollar deposits. M2 stands at a record level and represents the cash on sidelines ready to be put to work either by investing or spending. Cash balances are high as a direct result of COVID-19 restrictions and consumers who have simply not been able to spend. On Monday (November 16), Moderna Inc. announced that its vaccine for COVID-19 is 94.5% effective in primary testing. This announcement comes one week after Pfizer announced that their vaccine for COVID-19 was 90% effective in clinical trials. This is good news for consumers who have stayed on the sidelines, not spending or investing, due to fears of contracting the virus. A safe, effective and widely distributed vaccine for COVID-19 has the potential to release $19 trillion into the U.S. Economy. 

The U.S. Presidential Election is largely decided, although we are still awaiting a run-off for two U.S. Senate seats in Georgia. Currently, Real Clear Politics has both seats leaning Republican allowing for divided government, which the markets sometimes tend to favor. 

Last week’s market returns were mixed as investors slowly moved away from tech-heavy NASDAQ equities to more consumer related equities that make up the broader S&P 500 Index and the Dow Jones Industrial Average. The week ending November 13, 2020, had the Dow Jones Industrial Average returning +4.1%, the S&P 500 Index +2.2 and the NASDAQ (-0.6%). After last week’s moves, year-to-date returns are positive for all three market averages with the Dow Jones at +3.3%, S&P 500 Index +11.0% and the NASDAQ at +31.8%. In a year like 2020, with all the uncertainty and cataclysmic events, to have all three major market averages in positive territory certainly points to the resiliency of the U.S. economy and the forward-looking nature of markets. We’ve said before that the market is far more efficient and forward thinking than investors may give it credit. 

The Federal Reserve remains committed to providing liquidity and stability to the markets by keeping short-term interest rates near zero. Conversely, yields on the benchmark 10-year U.S. Treasury Bond continue to move higher little by little each week. After bottoming in August 2020 at 0.51%, the 10-year U.S. Treasury Bond stood at 0.92% as of November 16, 2020; but this level is dramatically lower than year-end 2019, when it stood at 1.92%. Watch for U.S. Treasury Bonds to fluctuate as the markets waffle between the news of higher infection rates of COVID-19 and further information about the release and distribution of an effective vaccine. The markets are digesting a lot of conflicting and impactful information all the while pointing to an eventual outcome of a massive release of cash into the economy. Timing remains uncertain but the outcome does not; which confirms the value of sound financial planning coupled with clear long-term thinking.