September 25, 2020
Stocks continued their sell off this week as anxiety continues to rise over the prospects that a second wave of Covid-19 cases may be materializing. Daily case counts in the U.S. have once again started climbing from their early September lows. Internationally, the United Kingdom, Spain, France, Germany, and Italy are all experiencing a similar trend. While Europe has avoided a full-blown lockdown, some cities are beginning to re-impose targeted local restrictions which are beginning to slow their economies as seen in this week’s IHS Markit Composite report. The rising case counts come at a time where the prospect for a follow-on stimulus deal prior to the election remains unlikely given where both Republicans and Democrats stand today. The impasse suggests any such deal will be punted to after the presidential election which is just 38 days away. With markets focused on a potential slowdown in the economic recovery, not much attention was paid to the otherwise strong data on durable goods and U.S. housing. For the week, the S&P 500 fell -0.63% for its fourth straight weekly loss.
Factory Floors Sweep Up Orders
For the fourth straight month, U.S. manufacturers saw rising demand for durable goods. Orders rose 0.40% in August, led by gains in machinery orders. Excluding the volatile transportation industry, orders also managed to rise 0.40%. Core capital goods, an important proxy for business investment, managed to increase 1.80% in August, bringing durable goods activity back above pre-Covid levels. With July and August’s numbers now in hand, and with preliminary figures from September starting to roll in, it is becoming clear that the third quarter bounced strongly from its April low but that the overall trend is softening. This is to be expected and even though the most recent readings suggest core orders and shipments remain positive, the market was more focused on the potential impact rising case counts might have looking further ahead.
Housing Bubble Grows
Pandemic buying continued in August as homebuyers continue to feel the need to change their surroundings. Existing home sales rose for the third straight month, hitting a 14-year high. Robust demand for luxury homes in the Northeast, now reopened following some of the strictest lockdown restrictions in the U.S. earlier this year, helped push existing homes sales up 10.50% year-over-year (yoy) in August. Not surprising, the strong demand at the high-end of the market pulled the median price of a home up to $310,600 or 11.40% yoy. It was not only the rise in demand that contributed to rising prices but the limited supply as well. Presently there is only about 3 months’ worth of inventory available relative to the six to seven months’ supply that is considered normal. Those thinking about buying better act fast. The average number of days a house sits on the market has fallen to 22 days from 31 days a year ago. New homes sales also rose to their highest levels in 14 years in August. Unlike existing home sales, the buying was concentrated for homes priced below $300,000 which is considered the sweet spot for first time buyers. This, in turn, pushed the median sales price down to $312,800. Builders’ still can’t keep up with the demand with supply slipping to 3.3 months. The new home sales figure was particularly encouraging because it is drawing new owners into the market, while also suggesting high consumer confidence in their job security and the economy that they are willing to take on a mortgage at this time. The home buying trend is likely to remain for some time as Covid-19 has reshaped how and where people will work and as low rates make it possible for renters to upgrade their space for a home office and family.
Eurozone Economic Recovery Stalls
The Eurozone economic recovery ran out of steam in September after a rise in Covid cases forced tighter restrictions on customer-faced businesses. The IHS Markit Composite Index clocked in at 50.1 for September, a level that barely signals expansion. The index was dragged down by the services component of the index which fell to 47.6 (recessionary territory) from 51.9 the previous month. Factory floors fared better with the manufacturing index rising to 53.7 from 51.7. On a regional basis, export powerhouse Germany managed to keep its composite PMI above 50. However, France saw its PMI fall below 50 for the first time in four months, suggesting its economy is contracting. The services sector is more susceptible to Covid factors and the good news is that so long as full lockdowns can be avoided, manufacturing will help to cushion against a deeper slide as factories continue to crank out products to replenish depleted inventories from earlier Covid-19 shutdowns. Still, the eurozone looks poised for a tough fourth quarter as it reckons with Covid’s resurgence.
A portfolio manager was quoted in the Wall Street Journal today saying, “it feels like a bit of a phony market right now.” He said it in the context that while the fundamentals had not really changed over the last four weeks, the market was reacting as if it had. For our part, what has felt phony, if anything, has been the euphoric levels to which the market ascended in the first place. Investors have known about the potential for a second wave. They’ve known about the election. They’ve known about the challenges to a stimulus deal, and from our standpoint we think it’s good that the market is finally reacting to what it has been talking about for the better part of the last six months. The big picture in our mind remains intact. Fall is historically a volatile time for markets and this year, with the stacking of factors, the current selloff is completely expected. There is a big positive hanging out there however, and that is ultimately the vaccine. So, while the market’s recent volatility might be a little uncomfortable, long term investors should actually welcome it.
The Week Ahead
It will be a big week for markets with U.S. nonfarm payrolls and jobless claims on tap. In overseas news, China releases manufacturing numbers.
Better, Faster, Stronger
Earlier this year in our Week in Review, we wrote that The Economist dubbed 2020 as “the beginning of the decade of the yold” or the “young old” who are individuals aged 65 to 75. We shared that for the first time in history, this older population will outnumber children by the end of this decade. This generation is also living and working longer and redefining what the golden years have typically looked like for many retirement-age individuals.
This week, we are taking a look at 75- to 80-year-olds who are also bucking trends. This group was the subject of a new study published this month. Hundreds of individuals aged 75-80 were given a battery of physical and cognitive tests in the early 1990s. The same tests were repeated in 2017 and 2018 with men and women aged 75-80. The results showed great strides in strength, speed, and other physical and cognitive measures among today’s 75- to 80-year-olds versus the same age participants 30 years ago.
One of the researchers noted that there are only a few studies in the world that have compared performance-based maximum measures between people of the same age in different historical times. The modern group showed the following meaningful differences:
- faster walking speeds
- grip strengths 5%-25% stronger
- knee extension strengths 20%-47% higher
- better cognitive functions in:
- verbal fluency
- working memory
Participants in the first cohort were born in the early 1910s, and participants in the second cohort were born in the late 1930s and early 1940s. The researchers noted several hypotheses for the improvements: the modern generation has grown up with better nutrition, access to better education, improved working conditions, better healthcare, and greater physical activity than their counterparts of 30 years ago.
The authors found a correlation between longer education and higher cognitive function. Education is known to shape and maintain cognitive performance as we age. The study’s authors shared that while the research was conducted in Finland, it may be generalized to other countries that have undergone similar societal changes.
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