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Top Market Takeaways: What dynamics are driving the markets now?

U.S. politics are front of mind, but they're not the only thing creating tailwinds and headwinds for markets.

Our Top Market Takeaways for October 9, 2020.


 

Market update
What a week

A lot has happened since we “spoke” last week, dear reader…mostly in the U.S. political arena.

  • President Donald Trump tested positive for COVID-19, was hospitalized, and returned back to the White House with gusto.
  • He snuffed out any remaining hope for another tranche of fiscal relief spending before the election with a tweet calling off negotiations (which prompted a sharp reversal to cause the S&P 500 to lose -1.4% on Tuesday)…
  •  …only to reignite it hours later with another tweet expressing urgency to deploy fiscal aid to airlines, the Payroll Protection Program, and another round of $1,200 stimulus checks.
  • And if all that wasn’t enough to keep you busy, Vice President Mike Pence and Senator Kamala Harris faced off in the first and only Vice Presidential candidate debate on Wednesday, which offered voters a more conventional viewing experience relative to last week’s showdown between Biden and Trump. 

But despite all the hubbub, the S&P 500 is up +3% heading into Friday. Markets are bound to stay focused on the U.S. until Election Day on November 3, and possibly for many weeks thereafter. That said, politics are only one of many factors driving price action in markets right now. Below, we highlight a few different dynamics that are generating headwinds and tailwinds in different areas of the market today. 

 

Spotlight
Headwinds and tailwinds

Biden has a healthy lead in national polls. The former VP’s national polling lead over President Trump has risen to 9.7% from 7.2% a week ago, according to RealClearPolitics. That’s nearly as wide as it’s been since it became a two man race. It’s worth noting that polling in top battleground states is tighter than the national average (RealClearPolitics has Biden with a 4.6% lead in that realm, versus Clinton’s 5.1% lead at the same point in 2016) and that President Trump’s approval ratings have remained relatively steady. Nonetheless, markets seem to be warming up to the possibility of a Biden victory and Democratic control of Congress.

A tailwind for clean energy. Clean energy companies are up a whopping +55% over the past three months, and over +80% year to date. Renewable energy fits squarely in our Sustainability megatrend, and we like it regardless of the U.S. election outcome due to powerful global momentum behind it. Other major economies like Europe and China are making substantial investments in green technology and infrastructure, and declines in the cost of renewable energy sources mean that, in many cases, they’re now as economical as those derived from fossil fuels.

A headwind for traditional oil and gas companies. Policy aimed at reducing CO2 emissions could put more force behind the transition from fossil fuel energy sources. Indeed, the traditional Energy sector (i.e., oil and gas companies) is down some -13% over the past three months, and off more than -45% year to date.

The housing market is shining bright. Home sales have showed a recovery that’s about as V-shaped as they come, and they’re now at levels not seen since before the Global Financial crisis. The boom has been fueled by pent-up demand and savings from the lockdown period, record low mortgage rates, and a wave of former urban dwellers choosing to move to suburbia. Low interest rates are helping boost residential construction, too (housing starts were up +2.8% year-over-year in August after a +23.1% surge in July) – a welcome development given the large decline in housing inventories versus last year. 

 

The chart shows a time series of the U.S. Pending Home Sales index from 2001 to present. The index has rebounded from its virus crisis lows, and is at its highest level since before the Global Financial Crisis.

 

A tailwind for Homebuilders. The S&P 500 Homebuilding segment is up +38% year-to-date, and an eye-popping +155% off the crisis lows. Given the ongoing strength in the housing market, we think the industry could be poised for further growth. We also see opportunities in adjacent pockets of the Industrials sector like Transports and Construction. 

A headwind for big city landlords. Data from RealPage shows that effective asking rents in major U.S. cities like San Francisco, New York, Boston, and Los Angeles fell 5-10% versus last year in the third quarter. It’s likely that rent prices will normalize as workers go back to the office and their respective cities (and out of mom and dad’s basement), but rental prices could face continued downward pressure in the work from home era. 

New waves of COVID-19 keep coming. 42 states have a 7-day average infection rate that’s higher than it was a month ago. New York City has closed hundreds of schools. New daily cases in Europe* are more than double than they were at April’s peak. Localized containment measures are growing more and more common, but the global healthcare community has made notable strides in learning how to effectively treat patients and providing guidelines to avoid super-spreader events. As such, we think another round of full lockdowns is unlikely, especially given the economic cost and now much lower mortality rates

A tailwind for the digital economy. We’ve spoken ad nauseam about how COVID-19 has accelerated innovation—there’s a reason why tech-enabled and healthcare companies have not only led the rally, but also shown resilient and stable earnings growth through the crisis. Consider that FAAMG+N stocks are on average up +40% this year. Taken together, the other 495 stocks in the S&P 500 are basically flat.

A headwind for high-contact sectors. As long as the pandemic persists and we’re still waiting on a vaccine, expect high contact sectors to suffer. Airlines (-43%), office REITS (-24%), and hotels, restaurants and leisure (-7%) are still all down on the year. Nonetheless, these sectors comprise a relatively small piece of the economic pie, and consumers have shown a high degree of rotation and adaptation to other larger areas of the economy (like home improvement, for example). This gives us conviction that growth, in aggregate, can continue to recover.

Tensions between the U.S. and China are still simmering. Although the relationship between the U.S. and China has exited center stage to make room for American politics, let’s not mince words: it’s still hostile. This week, news emerged that the White House is considering restrictions on Chinese payment platforms Alipay and WeChat Pay to prevent them from embedding themselves in the U.S. financial system. While both applications have very limited presence outside China, the development adds some uncertainty to the $35 billion IPO of Ant Financial (the firm that owns Alipay and is an affiliate of Chinese tech giant Alibaba), which reportedly will accelerate the listing process to avoid market turmoil over political risks. That’s just the latest in a series of technology-related posturing between the two countries. In the U.S., a “tough on China” stance has become politically popular on both sides of the aisle and we will likely see tensions around tech continue to rise regardless of who wins the election. 

A tailwind for domestically-focused U.S. and China stocks. The Russell 2000 index, which captures a universe of U.S. small cap stocks (which tend to derive the majority of revenues from the U.S.), has climbed +6% this week. China’s markets have been closed for a holiday, but the country’s “first, in first out” position in the global economic recovery has helped propel the onshore CSI 300 +17% higher this year. 

A (potential) headwind for the renminbi. To be clear, we think the renminbi is poised to appreciate versus the U.S. dollar due to a high interest rate differential and strength of Chinese exports. But ongoing tensions with key trade partners like the U.S. pose a risk. For example, China is lagging in its purchase targets laid out in the “phase one” trade deal, and if the U.S. starts to pressure China on those terms with punitive actions, it could mean downside for the renminbi. 

Bonus! It’s almost time to hibernate. Bears in Alaska’s Katmai National Park have been bulking up for their annual super slumber. As we highlighted a few weeks ago, humans made it fun by casting votes during Fat Bear Week to choose their favorite chunky bear of 2020.

— A tailwind for the absolute unit named 747. The winner of Fat Bear Week! Also, it’s very convenient for us that the winning bear shares a name with a jumbo airplane, given that we’re talking about headwinds and tailwinds…

A headwind for the salmon population. Yum.

*Europe is represented by the European Union, United Kingdom, Iceland, Norway, and Liechtenstein.

All market and economic data as of October 2020 and sourced from Bloomberg and FactSet unless otherwise stated.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

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  • The MSCI China Index captures large- and mid-cap representation across China H shares, B shares, Red chips, P chips and foreign listings (e.g., ADRs). With 459 constituents, the index covers about 85% of this China equity universe. Currently, the index also includes Large Cap A shares represented at 5% of their free float adjusted market capitalization.
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