Markets are always wary of uncertainty, and this has been an unprecedented period of it. But, last week, health and policy officials offered a healthy dose of conviction that should help bolster confidence as we dive headlong into what will, no doubt, be a whirlwind fall and winter.
The week was packed with noteworthy developments and data, so let’s dive right in.
WALL STREET WRAP
Lifting the Fog on the Vaccine: Last week, health officials and the Federal Reserve both cleared some of the fog and provided timelines to help anchor the public’s expectations.
CDC Director Robert Redfield on Wednesday told members of Congress a vaccine would be widely available to all Americans in late spring to early summer of 2021, which implies a potential “return to normal” by fall. However, during a briefing Friday, President Donald Trump said Redfield was “confused”, instead implying the vaccine would be widely available by April 2021 and even for limited use as soon as October or November. Dr. Anthony Fauci struck a balance, saying “I think in many respects they were both right”.
While the Trump/Redfield back-and-forth makes political waves, the big take away for Wall Street is twofold: a vaccine is looking more certain, and now there’s a base-level timeline for that return to normal. Importantly, that timeline gels with expectations (we’ve been forecasting a mid-2021 vaccine release in our comments for months now).
That information also makes it easier for investors to forecast earnings and for businesses to plan. Importantly, it means every day is a day closer to the finish line, and that should provide a lift for sentiment. And, if that vaccine arrives sooner than spring 2021, that’s simply more upside.
Lifting the Fog on Rates: The second revelation last week came from the Fed following its Open Market Committee meeting. As widely anticipated, there was no movement on rates. But in his post-meeting news conference, Chairman Jerome Powell gave us some insights into just how long rates will remain in the basement. Powell said the Fed will maintain its current policy until the economy has achieved “maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.” All 17 Fed officials who participated think rates will remain where they are until at least the end of next year, while 13 of 17 officials projected rates would remain unchanged through 2023. Either way, the message is clear: The bar is high for a rate hike.
It’s also another expectation anchor that allows markets to anticipate what’s coming, and a little certainty is always welcome.
Retail Growth Modest, Housing Strong: Retail sales in in August rose 0.6 percent, which was the fourth consecutive month of growth but a bit below expectations. Recall that sales recovered at a torrid pace from lows reached during the pandemic. Although momentum has normalized, individual households still have sizable savings stashes with the savings rate at 17.8 percent versus the long-term trend of 5 to 8 percent — that could support growth going forward.
When it comes to big purchases, consumers are clearly still eager to buy. NAHB builder sentiment is now at 83, a level that eclipses the housing bubble in 2005-06. Housing starts were a little weak, but that’s attributable to a few factors. The storms sweeping through the southern U.S. have slowed construction. Contrast that with construction in the Midwest, with no weather-related slowdowns, which hit a 14-year high. Digging deeper into the data, single family starts were up 4.1 percent to 1,021,000 — the fastest pace since February. On the other hand, multi-family (apartments and condos) fell 23 percent. In other words, individuals are building while larger real estate developers have slowed down a bit.
Consumer Sentiment Sailing Higher: Consumer sentiment improved in early September to a 6-month high of 78.9, according to preliminary results from the University of Michigan survey. That beat expectations of 75 and has essentially dug out of pandemic-driven lows. The proportion of respondents who noted positive economic developments rose to 40 percent, up from just 25 percent last month, while views on current conditions and future expectations also improved — just 16 percent believe the economy will worsen.
The survey also indicated the election is starting to have some impact on results. Since 1976, the Michigan surveys have asked consumers who they think will win the election (not who they want to win) from July to September. They’ve gotten it right in every election, except in 2016 (most expected a Clinton victory). Currently, President Donald Trump and Joe Biden are in a virtual tie. To keep this broad, the election is starting to shape how consumers view the setup for the economy.
THE WEEK AHEAD
As the Election Rhetoric Ramps Up: As we saw in the Michigan sentiment surveys, the election is beginning to shape people’s economic outlook. However, that doesn’t mean you should let Nov. 3 have an outsize impact on your investments. In the coming weeks, we’ll be sending out some deeper dives on markets and the elections. Overall, we hope to make one message clear: The presidency is influential, but when it comes to the economy there are bigger forces at play. As history has shown, no matter who takes office, market returns over the long-term are pretty good.
PMIs: This week we’ll get another round of the IHS Markit services and manufacturing PMIs. These are closely watched measures of economic activity, and the story here hasn’t changed much through 2020: Markets are looking for steady improvement and solid signals that the economy is on solid footing.
A Check on Vaccines and Treatment: As we’ve done throughout the year, we’ll dig into some of the bigger developments surrounding vaccines and treatments for the coronavirus. Expect the storylines to amplify in the coming weeks as late-stage trial data from several drug companies starts to come out. Be prepared for some volatility if a trial disappoints or impresses. Remember, this is revolutionary science occurring at a rapid pace, and scientific discovery isn’t always linear. Sometimes there are setbacks, such as the briefly paused AstraZeneca trial, but scientific setbacks are always an opportunity to learn more. Big picture: It’s all part of a process to ensure a safe, effective vaccine. Thus far, health officials are quite confident that we’ll get there.
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