Markets, Economy

Weekly Kickstart (7/20/2020-07/24/2020)

7/20/20 8:00 AM

iStock-626627280.jpgStocks continued higher last week, as the S&P 500 rose by 1.25 percent to 3,224.73. That left the benchmark index down just 0.19 percent 2020-to-date, and 44.13 percent above the March low. Despite the strong finish the price action last week was actually quite choppy. Some of this was simply due to the usual liquidity issues seen during tax week, i.e. the April 15 deadline that was pushed back to July 15, but the uncertainty surrounding the “second wave” of COVID-19 and the next stimulus package likely exacerbated the intraday swings as well. Another issue that might have contributed to market volatility recently, and could continue to do so this fall, is the upcoming election. Indeed, 15 percent of participants in Bank of America Merrill Lynch’s monthly global fund manager survey cited the U.S. election as the single biggest tail risk for the markets at the moment. Credit investors in a separate BofAML poll were even more concerned about the November election and now consider it a greater threat than both the coronavirus and a sluggish economic recovery.

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Why might investors be worried about the election? There are lots of possible explanations but in general markets like predictability, e.g. stable cash flows, earnings growth, etc., and a regime change in Washington would mean the potential for big alterations to the tax code, regulations, trade policy, government spending, and numerous other issues. From this viewpoint an election outcome that results in gridlock could be preferred over a one-party sweep since it reduces the amount of new legislation (change) that can be passed. Given the strong performance of equities over the past hundred years, though, it is clear that the market has a tendency to eventually adapt to shifts in the political landscape. However, none of this means that the near-term event risk surrounding the election is not elevated. If the Dems gain control of both Congress and the White House, for instance, some believe the new administration will try to raise the tax rate applied to capital gains. Ahead of similar tax code changes in the past investors have typically decreased equity allocations prior to the rate increase, according to Goldman Sachs, and then later reestablished any equity positions they sold. Moreover, “past capital gains tax hikes have been associated with short-term declines in equity prices as well as the underperformance of high-momentum ‘winners’ that had delivered the largest taxable gains to investors ahead of the rate hike … [but] household equity allocations have risen during the six months following each of the three capital gains tax rate hikes during the past 40 years.” Regardless, there are countless ways the November elections can play out, and any regular investors uncomfortable with this potential uptick in volatility may therefore want to continue to use rallies as opportunities to review their positioning and make sure it is properly aligned with their risk tolerance, nearness to retirement, and other unique variables. As always, we are here to help with any questions you may have.

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To recap a few of the things we learned about the economy last week, the positives included that homebuilder confidence increased, single-family housing starts rose, building permits climbed, small business owner optimism rebounded, industrial production picked up, capacity utilization improved, retail sales jumped, and household inflation pressures stabilized. As for the negatives, mortgage purchase applications declined, rent delinquencies increased, gauges of regional manufacturing activity sent mixed signals, non-seasonally adjusted initial jobless claims rose for the first time since March, and consumer sentiment deteriorated. This week the pace of economic data slows down but there are still a few important reports on housing, manufacturing, and employment scheduled to be released.

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What To Watch:

Monday

  • Nothing significant

Tuesday

  • Chicago Fed National Activity Index 8:30 AM ET

Wednesday

  • MBA Mortgage Applications 7:00 AM ET
  • FHFA House Price Index 9:00 AM ET
  • Existing Home Sales 10:00 AM ET
  • EIA Petroleum Status Report 10:30 AM ET
  • 20-Yr Bond Auction 1:00 PM ET

Thursday

  • Jobless Claims 8:30 AM ET
  • Leading Indicators 10:00 AM ET
  • EIA Natural Gas Report 10:30 AM ET
  • Kansas City Fed Manufacturing Index 11:00 AM ET
  • 2-Yr Note Announcement 11:00 AM ET
  • 5-Yr Note Announcement 11:00 AM ET
  • 7-Yr Note Announcement 11:00 AM ET
  • 10-Yr TIPS Auction 1:00 PM ET
  • Fed Balance Sheet 4:30 PM ET
  • Money Supply 4:30 PM ET

Friday

  • New Home Sales 10:00 AM ET
  • Baker-Hughes Rig Count 1:00 PM ET
 

 

Sources: Econoday, BofAML, Goldman Sachs, FRBSL

Post author: Charles Couch

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