Markets Balancing Challenges of Today With 2021 Optimism

Markets struggled to find a clear direction over the past week as investors tried to balance challenges today with the promise of a return to normal in 2021. Key vaccine breakthroughs from Pfizer and Moderna accelerated a market rotation into sectors of the economy hardest hit by the pandemic — energy, travel, leisure and cyclicals. The vaccines essentially started the countdown on the pandemic’s duration, and money has shifted into those beaten-down sectors in anticipation of a broader market and economic recovery in 2021.

But we’ve still got a difficult winter ahead of us. Cases are soaring, and the resulting stress on medical systems has forced lawmakers to announce new (but localized) restrictions in certain parts of the country. As the week closed, “stay-at-home” stocks that have rallied through the year once again pushed higher as consumers and businesses will likely lean on those services and products through the winter.

In the weeks ahead, you don’t want to be caught between the “work-from-home” and “back-to-the-office” trading in markets. It would be short-sighted to abandon cyclical, value stocks and funds in an effort to chase those stocks and funds that have fueled this year’s rally (or vice versa) — and, unfortunately, many investors tend to do just that. It’s important, even when markets are performing well, to work with an advisor and stick to a financial plan that keeps you invested in a diversified, balanced portfolio with broad exposure across sectors and asset types. A time like this, when the market is in a bit of a transitory period, is when the benefits of diversification really emerge.

Now, let’s get to the week that was and the week to come in markets.

WALL STREET WRAP

Big Retailers Show Strength: Some of the biggest retailers in the country reported strong top-line results last week, driven by robust online sales. Walmart’s same-store sales rose 6.4 percent, fueled by a 79 percent increase in their e-commerce sales. Home Depot comparable sales rose 24 percent (online sales grew 80 percent); Target comparable sales were up 20.7 percent (online sales up 155 percent). Costco will report earnings in December, but the company recently announced a $10 special dividend for shareholders — likely a positive harbinger of what’s to come.

“In case you’re wondering if the strong sales of big-box retailers are slowing down Amazon’s growth, the answer is clearly ‘No,’” says Jeff Nelson, a portfolio manager at Northwestern Mutual. “Amazon reported a 39 percent increase in their North American sales when they reported at the end of October.”

And look for e-commerce to continue accelerating as holiday spending picks up amid a pandemic keeping many consumers at home. Unofficial data from Verizon indicates holiday shopping online has soared 82 percent in the first week of November compared to last year.

But Broader Sales Grow at Slower Rate: While select big-box retailers saw robust growth last quarter, consumer spending more broadly grew at a slower pace in October. The Commerce Department on Tuesday said retail sales in stores, restaurants and online rose a seasonally adjusted 0.3 percent, which is below the 1.6 percent rate of growth notched in September. But we’ve come a long way: Sales are 34 percent higher than where they stood at April’s lows and 4.4 percent above pre-pandemic levels. Sales pulled back in groceries, clothing and restaurants. As we saw from retail earnings, purchases continued to shift online as e-commerce sales rose 3.1 percent in October. 

Vaccine Rollout by December? Pfizer and BioNTech on Friday became the first companies in the United States to request emergency-use authorization for a coronavirus vaccine. Pfizer on Wednesday released new data showing its candidate was 95 percent effective with few side effects. With FDA approval, the vaccine could be available by late December. The White House’s Operation Warp Speed advisor, Dr. Mocref Slaoui, said the vaccine and necessary supplies will be delivered to immunization sites within 24 hours of approval, with each state determining how and where they are sent.

Housing Sector Still Going Strong: Homebuilders have never felt better than they do now. Overall builder sentiment rose to 90 in November, up from 85 in October (anything above 50 is considered positive), according to the latest NAHB/Wells Fargo Housing Market Index. November’s reading is a new record for the index, which traces its roots back to 1985. In other metrics, single-family building permits remain at a 13½ -year high, and housing starts rose 4.9 percent in October to a seasonally adjusted annual rate of 1.53 million. Meanwhile, existing home sales hit their highest level in 15 years, rising 4.3 percent in October to a seasonally adjusted annual rate of 6.85 million. Homes were on the market just 21 days, on average, before they were sold in October.

The housing market is enjoying a confluence of tailwinds, including low mortgage rates, a large cohort of Millennials looking to purchase homes, a demographic shift to the suburbs and a relatively low amount of available inventory. The supply of homes on the market is the lowest on record, which is pushing up demand and the prices of homes as a result.

THE WEEK AHEAD

Preliminary Checks on Services, Manufacturing: It’s a short holiday week, but it’ll be packed with some key data points — Wednesday will be particularly busy. Preliminary November PMIs from the services and manufacturing sectors will kick off the week on Monday. Both sectors have been in expansion mode, with manufacturing holding a slight edge over services in pace. Economists are expecting both PMIs to remain well above 50 this month. 

A Post-Election Consumer: There’s a lot for consumers to digest heading into the final month of 2020: the election results, the rise in coronavirus cases, new restrictions in some states and the expiration of key unemployment aid for many people. We’ll see how that’s impacting our collective view on the economy when the consumer confidence index comes out on Tuesday.

Sticking with the consumer, we’ll also get a read on October spending, income and home sales this week.

Are Businesses Spending? While consumer spending is a critical component for economic growth in the U.S., another key barometer is business spending. Both durable goods orders and capital goods orders data (also due Wednesday) offer a glimpse into how much businesses are spending and on what. That can be a nice leading indicator of economic activity, as businesses typically invest in anticipation of more demand.

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