09/15/2020
Stocks endured another week of choppy trading last week, full of down days followed by up days. In total, the S&P 500® index was down 2.5 percent. This followed its 2.3 percent decline of the previous week. From its peak on September 2 the index is now lower by 6.7 percent. It is no secret that the tech sector has suffered the worst of the declines, falling 11.1 percent since the index’s peak. Communications services and energy have been battered as well, tumbling 8.2 and 7.4 percent respectively. As has been noted before, cyclical groups have fared relatively better, but no group is positive. Materials are down only 1.8 percent and industrials are down just 2.9. Utilities and financials have also held up relatively well. The Nasdaq composite has fared even worse than the S&P 500. It fell 4.1 percent last week, after falling 3.3 percent the week prior. From its September 2 peak, the index is lower by 10 percent, and the Nasdaq 100 is down 10.7 percent.

It is difficult to say whether the correction in technology and its kindred spirits in the momentum trade has further to run. The Nasdaq has enjoyed just one day of higher prices since its peak, while suffering five down days. And it ended last week on a decidedly weaker note, falling on both Thursday and Friday. The economic data has been somewhat soft of late, providing a convenient excuse to take profits. And while the declines so far have certainly erased some of the excess in valuations, the poster children of the momentum trade are by no means cheap. Facebook is trading at 33X earnings, Apple at 34X, Alphabet at 35X, Netflix 72X, and Amazon at 120X. Of course, these companies represent the growth opportunities in this economy and should command a higher multiple. The question is how much higher.

High Frequency Data Points Show a Slowdown in Economic Activity

Last week’s jobless claims report was the latest example of the economy’s third quarter economic recovery flattening to some extent. The Atlanta Fed’s GDPNow model is forecasting robust annualized growth of 30.8 percent in the quarter, just shy of its peak forecast for the quarter of 31 percent just one week ago, so there has been only slight deterioration in the outlook, at least according to this model. In fact, the model has shown steady improvement over the past month from its 20.5 percent forecast on August 12. But there has been a slowdown in the rate of improvement among the high frequency data points, including weekly jobless claims, continuing claims, Apple mobility trends, OpenTable diners, and TSA travelers.

Since the start of summer, the major holidays have represented temporary peaks in social mobility, followed by spikes in infection rates. Memorial Day and the Fourth of July exhibited this pattern. Labor Day seems to be exhibiting a similar result as the number of infections nationally has climbed sharply in the last few days, after having fallen to a three-month low on September 8. And according to the CDC, cases of the seasonal flu start to rise in October, and peak between December and February. So, we are not far from the time when a so-called second wave of COVID-19 could coincide with the normal flu season, causing further disruption.

Investors Get a Deeper Look at the Economy this Week

The week ahead is quite full on the economic calendar. Reports on industrial production, retail sales, housing starts and permits, homebuilders confidence, jobless claims, leading indicators, and consumer sentiment are all scheduled. The Federal Reserve meets this week as well and will publish its latest estimates of future economic activity and the path of Fed funds. It may also choose to amplify its outlook for the path of policy and how it intends to achieve its new average inflation framework, although that could come at a later meeting, likely December.

Earlier today, Monday, the Eurozone reported its industrial production data for July, which fell fractionally shy of expectations, but the previous month was revised higher. And later in the week China will report its August data for industrial production, retail sales, and fixed investment.     

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Sources: Factset, Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.
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The GDPNow forecasting model provides a "nowcast" of the official GDP estimate prior to its release by estimating GDP growth using a methodology similar to the one used by the U.S. Bureau of Economic Analysis. GDPNow is not an official forecast of the Atlanta Fed. It is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model.

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