• Greg Richardson

Economic recovery hits headwind as infection rates rise

The beginning of this week gave investors a decision between positive hope of a vaccine or negative reality of a spreading virus. It ended with a battle between the Federal Reserve and the Treasury.


On Monday this week, the Dow Jones Industrial Average hit an all-time high of 29,950.44 when the announcement of a second COVID-19 vaccine was made. That was the Dow's first record close since February of this year. The S&P 500 also saw a record day on Monday, closing up 1.2% at a record 3,626.91. The news of the vaccine efficacy, and multiple companies conducting successful trials, pushed investors into value stocks. These kinds of stocks are shares of companies that provide services and make goods. These stocks have been largely down during COVID because of their reliance on a strong economic recovery.


The chart below from CNBC shows where the peaks happened with the vaccine news from Moderna and Pfizer.

But just as quickly as the markets hit record highs, they took another tumble with Wednesday's announcement by New York City Mayor Bill DeBlasio that they would close schools due to an increase in the positivity rate. California moved back to a limited stay at home order, essentially instituting a curfew for nonessential work and gatherings.


The markets saw two straight days of losses after the Dow and S&P hit record highs. Thursday overnight trading saw Dow futures dipping by 200 points as the exponential increase in reported cases put a damper on the hopes of the vaccine helping lead to a quicker economic recovery. The 10-year Treasury note yield got close to going back over the 1.0% mark on the back of Monday's surge. But dismal government data on consumer spending pulled the yield back down later in the week. In early Friday morning trading, stocks were relatively flat and the 10-year Treasury note yield was trading at 0.846%.


The retail sales report from the Commerce Department this week helped pushed Treasury yields down. Retail sales rose by just 0.3% in October, with core retail sales rising by just 0.1%. September's revised numbers also show concern, with core sales rising just 0.9% as opposed to the previously reported 1.4%. As lockdowns are reinstituted, and more Americans run out of federal financial support, the numbers are only expected to worsen in next month's report.


Data from the Labor Department showed nearly 750,000 Americans filing initial unemployment claims this past week. That was higher than expected and also the first increase in four weeks. When you look at the four-week moving average, overall unemployment claims are down by more than 13,000. However, when you look at the chart below from CNBC, you see just how minimal any change has been since dramatic decreases earlier in the year.

The silver lining is another decrease in continuing claims, which fell to 6.37 million. However, keep in mind that many people have run out of available benefits with just 26 weeks of unemployment payments allowed.


Investors did get a little boost on Thursday as the Senate has reignited negotiations for further federal aid to those affected by the pandemic shutdowns. However, an impending battle between the Federal Reserve and the Treasury Department could shake up the economy even more.


MNUCHIN, POWELL FACE OFF ON SUPPORT


As we get closer to the end of the year, we are also inching closer to the end of many crisis-era programs instituted by the Treasury Department and the Federal Reserve that have, more or less, helped keep the economy afloat since March.


Mnuchin outlined his plan in a letter to Fed Chair Jerome Powell. In it, he requests that the Fed return any unused funds distributed via the CARES Act so that the money could be reallocated by Congress. Under the $2 trillion CARES Act, $455 billion was allocated to the Treasury.


That money was initially distributed to be used to fund things like the Main Street Lending Program and also as a vehicle to purchase corporate bonds. As of Thursday this week, the Fed had made $5.4 billion in Main Street loans with the Municipal Liquidity Facility issuing $1.7 billion in loans.


The Fed rebutted that it would "prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy."


Mnuchin's plan allows for a 90-day extension to other programs involved which include supplying cash to core financial markets, like those for short-term corporate credit. Mnuchin's letter implied that the lending programs, if needed again, could be reinstated upon request by the Fed with funding from the Treasury's own fund or newly allocated Congressional money.


MORTGAGE RATES DROP AGAIN, HOUSING HITS THE GAS


For the thirteenth time this year, mortgage rates have hit a record low. Freddie Mac's 30-year fixed-rate mortgage average came in at 2.72% this week, with analysts citing weak consumer spending data as the reason for the decline. This week also marks seventeen straight weeks with the Freddie Mac 30-year fixed-rate average coming in below 3%.


The housing market hit a small speed bump this month with the election, as expected, but the demand came back in full force the following week. The Mortgage Bankers Association's latest data shows Americans wasted no time getting back into the mortgage market, with weekly applications rising 4% for the week (seasonally adjusted). Annually, volume was up 26%. Refinances were up 98% annually.


Existing home sales hit a fifth-straight month of increases, growing by 4.3% monthly in October and 26.6% annually, according to data from the National Association of Realtors. The NAR's report also outlines a record-low inventory of 2.5 months if we stay at the current sales pace. Not surprisingly, 72% of homes sold in October were listed for less than a month. The NAR's data also showed that the median price on an existing home jumped by 16% from this time last year, to $313,000.


Builder confidence reached an all-time high in November. The National Association of Home Builders and Wells Fargo Housing Market Index reached 90 points, the highest since its inception 35 years ago. This was also only the third time the index broke 80 (scale from 0-100). This index is important because it measures not only current single-family home sales, but expectations for the next six months.


The lingering issue with construction of new homes is affordability. Construction costs have skyrocketed during the pandemic, as multiple natural disasters have compounded the intense demand for lumber and other supplies. The tailwind for construction is the shift from cities to suburbs as families look for more space amid lockdowns. Low interest rates are also helping to balance the cost of supplies.


*Due to the Thanksgiving Holiday, we will not have a Market Report next week.

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