The markets last week focused on COVID-19 and prospects of a vaccine available for distribution in the first quarter of 2021. Indexes were mixed with technology dragging while cyclicals led the advance. The TSX gained 2% for the week, S&P 500 lost .08%, MSCI EAFE bounced 1.4%, Nasdaq eked out a modest .22% with the broader-based Russell 2000 rising 2.28%. In Canada and the US, energy and financials recorded strong advances on vaccine hopes and a return to normal. Canadian technology, consumer discretionary and healthcare names lagged, and in the US, technology and consumer discretionary dragged. Leadership rotated from the growth-oriented stay-at-home names to undervalued value names more sensitive to economic recovery. Investors are again wondering if the coronavirus vaccine is the catalyst for the rotation to value from growth and whether it will hold.
In conjunction with the previous week’s news from Pfizer on a vaccine, positive news from Moderna increases the probability of a vaccine earlier in the year than expected, increasing the odds of a more sustainable recovery. However, in the meantime, the markets are held hostage to the results and the efficacy of testing and ultimately of the vaccine in general use. The distribution will also take time, with the most vulnerable and frontline workers first to be vaccinated. Further, it will take time for the general population to be vaccinated even if they are willing participants. The ebb and flows of the news could create volatility in the coming months as investor sentiments react.
Weekly initial first-time claims rose to 742,000 from 711,000, while the continuing claims fell to 6.4 million from 6.8 million. Federal claim programs extending benefits rose to 4.4 million from 4.1 million, offsetting most of the continuing claims decrease. On Tuesday, the US Commerce Department released retail sales estimate for October rising .3%. Core spending, excluding automobiles, gasoline, building materials, and food services, rose just .1%. Data for September was adjusted to 1.6% from the original estimate of 1.9%, with the core sales adjusted to .9% from the previously reported 1.4%. The housing sector continued leadership with new home and existing sales hitting new highs since 2006-2007. Industrial production in the US climbed 1.1% for October but remained below pre-pandemic levels and marginally better than analysts’ estimates of 1%. A critical component that reflects manufacturing output eked out an increase of 1%; however, it is 5% below levels in February. Capacity utilization is operating at 72% versus 77% a year ago. The expectation is for softer data releases as new restrictions are imposed from rising cases of the coronavirus.
It remains to be seen how the new US administration will handle the rising number of cases. The alarming increase in cases enhances the possibility of new restrictions that will limit economic recovery. This week alone, the New York City public school system announced the switch to remote learning. With rising cases headlining the news each day, consumers are less likely to leave home. Employers are less likely to re-open offices, slowing the velocity of transactions necessary for a healthy and diversified economic recovery. Economic data in the coming weeks will confirm the economic direction. While the expectation is that we will return to the old normal, the likelihood of that is more remote than current thinking based on all indications from our elected and non-elected global leadership.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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