The market was flat on the week after early gains were washed away by rumors of little progress in stimulus negotiations and bleak economic data. Big banks and Airlines contributed to the bearish market sentiment after providing disappointing future guidance. Check out this week’s Konvergent Market Update Blog a deep dive into the headlines moving the market this week.

Here are the top things we’re covering this week’s blog:

The Market

The S&P was up 0.1% on the week. Most of the gains came on Monday as the market fade throughout the week on lackluster stimulus rumors and earnings reports. With the election now less than three weeks away, there is a clear lack of investor confidence on which way the market will move next. On one hand are market bulls who are looking for a strong earnings season and large stimulus package to help justify the massive gains. On the other are those who remain bearish and under the impression that the market is in a historic bubble set to pop if the election is heavily contested or in the event that a surge in COVID cases leads to another government shutdown. As a result of all this uncertainty the market continues to have volatile weeks while whipsawing on any relevant headlines.

Employment Data

New claims jumped last week to 898,000. This is the highest level seen since late August and certainly is not a good sign for the employment recovery. Pandemic claims continued to fall coming in at 372,891. This brings the total new claims to over 1.27 million. With the virus season underway, a surge in new claims could bring more trouble for the already weakened economy.

Continuing claims dropped further to just over 10 million. While this is a positive sign, it is important to note that this reading is on a one-week delay. With the jump in new claims this week, we may see continuing claims follow suit in the month ahead.

Total Claims for Unemployment from all programs came in at 25.29 million. This represented a small decrease over the previous week. However, one of the main catalysts in the drop was the nearly 800,000 fewer regular state claims. While the headline for this appears positive, a deeper look reveals that regular state claims allow unemployed workers 26 weeks of additional benefits. Looking back 26 weeks from now was late March when the unemployment claims first began to spike. Because of the 26-week cutoff, we will likely see the total unemployment reading continue to fall. You can see this in the chart as Pandemic Emergency UC rose by about the same level as state claims Fell. This does not indicate that the work force is strengthening, instead that many already struggling people will lose benefits.

 

Economic Data

Retail Sales data created a stir of excitement after surging above analyst projections[1]. The Year over Year (YoY) reading came in at 5.40%, the highest level since December 2019. This was a positive sign for the retail industry that was hit especially hard at the start of the COVID-19 pandemic.

Another way to evaluate the retail sales numbers is through the chart below. While the initial collapse was steeper than in previous recessionary times, the recovery has been a v shape recovery like never seen before.

In contrast to retail, manufacturing and industrial production have struggled to gain ground lost during the pandemic. Even months after the economy reopened, industrial production remains down 7.30% YoY and Manufacturing  down 6.00% YoY. One major reason for this is that both industries were declining before the pandemic even began. When the nation began shutting down in March, a historically abysmal period for production became inevitable. 

The chart below shows that despite a small recovery, industrial production remains deep in recessionary levels.

Despite the data, the S&P 500 Industrial Sector ETF (XLI) is simultaneously within reach of its all-time highs. This is a clear example of the bullish stock market diverging from recessionary economic data.

Additional evidence of the weaking recovery is Capacity Utilization, which measures the proportion of potential output serving as actual output. While September saw an increase to 71.54%, this reading is still far off the pre COVID highs. Moreover, the initial spike higher over the summer has begun to taper off.

While for some government assistance programs are what is needed to maintain a healthy lifestyle, other high earners have spent the past six months stuck at home adding to their savings accounts. The chart below shows the results of a survey asking households about how they spent their stimulus checks. There is a clear correlation between the income amount and use of payment, with significantly more low earners dedicating their checks to imminent needs.  

Articles of Interest

Stimulus Update – Another week of intense stimulus negotiation without any meaningful progress made. President Trump, House Speaker Pelosi, and Senate Majority Leader Mitch McConnell all remain far apart on the structure of a second package. Check out this article for additional insight into where each side stands going into the final weeks before the election.

  • Earnings Season Kickoff – This week brought the commencement of the highly anticipated Q4 earnings season that will likely play a significant role in how the market performs in the weeks leading up to the election. Check out this article for a summary of the many surprises and disappointments during this first week of reports.

Social Media Post of the Week

While the stock market has experienced a strong v shaped recovery, there are still many indicators pointing to weakness in the economy. Remember that last year at this time there were 23.8 million less people on unemployment.

Don’t forget to follow us on your favorite Social Media Feeds!!

Non-Financial Story of the Week

It was nice to have a laid-back weekend. We ended up watching a family movie on Friday evening – Bridge to Terabithia – based on a novel of the same name.  The movie was very different from what we expected based on the previews and had a very sad ending but taught a lot of great lessons along the way. One of them was to have an open mind and active imagination.  It was pretty cool that the next day while we were on a family walk through the woods, I saw my 2 daughters create an imaginary world where trees were giant trolls and big impressions in the ground were their footprints, dragon flies were Terabithia warriors and other fun creations.  It is a good reminder for me as well to be better at using my imagination with them and getting into the story.  It can be too easy to watch from the sidelines while they play, and it was fun to participate with them!

Bottom Line

With the election fast approaching and political tensions intensifying, we can expect to see additional weeks where the market moves with elevated volatility but does not make any sizeable gains or losses. Even after Nov. 3 there are still many factors that could take a toll on the market and cause volatile price action. Until there is more conviction on where the market is headed, we will remain cautious. 

If you have any questions about any of the information in this week’s blog or what you should be doing right now with your personal and business planning, do not hesitate to reach out to us by sending an email to info@konvergentwealth.com or calling us at 253-236-7000.


[1] https://www.reuters.com/article/usa-economy-idUSKBN2712HS

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