09/29/2020
The S&P 500® index fell for the fourth straight week, although this time it wasn’t the fault of technology stocks. The tech sector actually rose 2.0 percent, but it wasn’t enough to prevent the broader average from falling 0.6 percent, leaving it 7.9 percent below its September 2 peak. The worst of last week’s declines were centered in the cyclical sectors of the index, which had recently been the beneficiary of the selloff in tech and other related momentum trades. Energy stocks fell more than 10 percent, but account for little more than just 2.1 percent of the index market cap. Materials fell 5.0 percent, but themselves account for just 2.6 percent of the index. 

It was the financial stocks that were the worst drag on the index, falling 4.8 percent and accounting for a 9.6 percent weight. Banks in particular got hammered. The KBW Nasdaq bank index skidded 6.8 percent, in part the result of reports of money laundering at certain large money center banks. And although it came close on Thursday, the index did not pierce its 100-day moving average. In contrast to the S&P 500, the Nasdaq Composite actually rose for the first time in four weeks, climbing 1.1 percent and trimming its decline since September 2 to 9.5 percent.
 
The Dollar Climbs; Corporate Mortgage Backed Securities Show Some Concerning Trends 

The DXY dollar index climbed for the third week out of four this month and has now rallied by 2.6 percent this month after five straight months of declines. Commodity prices fell last week, and the Bloomberg Commodity Index is now lower by 3.6 percent since the start of the month. 

Treasury bond yields remained rangebound, anchored by the Fed funds rate at 0.0-0.25 percent, and few signs of rising inflation. The ten-year note slipped four basis points to end the week at 0.65 percent, remaining in the narrow range that has persisted for six months. In contrast, high yield spreads rose for the third time in the past four weeks. The option-adjusted spread of the ICE Bank of America High Yield index has climbed 64 basis points during that time, coincident with the selloff in equities. 

But more immediate concerns are emerging in the commercial mortgage-backed securities market, especially in the hospitality and retail sectors, as delinquency rates rise, properties assessments have fallen, loan to value ratios have risen, and downgrades have climbed. And rising coronavirus infection rates in roughly half of the 50 states does not bode well for an acceleration of travel, social mobility, and back to work that would benefit these sectors, especially as the seasonal flu season is getting underway. 

Data Shows the Economic Recovery is Losing Some Momentum, Except for Housing
 
Last week’s data continued to show an economy that was continuing to heal but has lost some momentum. The notable exception to that characterization is housing, which is red hot. New and existing home sales continue to rise, boosted by low mortgage rates and a lack of inventory. And the trend is pushing prices higher, contributing to gains in consumer net worth. Durable goods orders were also strong, and the flash PMIs plateaued but at a reasonably strong level. On the other hand, gains in the labor market have stalled, as weekly jobless claims rose slightly, and continuing claims levelled off. 

This Friday’s September jobs report will provide additional insight and is expected to show the creation of 850,000 new non-farm jobs, which would be the third straight month of slowing job creation. In fairness, it is unrealistic to expect the same pace of job creation compared to that seen following the initial reopening of the economy in the spring and throughout the summer. The unemployment rate is expected to drop only slightly, to 8.2 from the current 8.4 percent. That would still leave some 13 million Americans out of work. It might be remembered that prior to the onset of the pandemic and subsequent economic lockdown, in February the unemployment rate was 3.5 percent. Also, on this week’s economic calendar is the ISM report on manufacturing, personal income, spending, and prices for August, consumer confidence, and pending home sales. 

And despite entreaties from a number of quarters, including the Federal Reserve, Congress appears to be no closer to agreeing on another stimulus package, especially given the focus on filling the vacancy on the Supreme Court. And this week the airlines forbearance on layoffs and pay cuts expires. The presidential election is now just five weeks away, and the first debate is Tuesday evening. 

Lastly, this week the U.K. and E.U. enter a critical phase in Brexit trade talks as time is running short to get a deal ratified by the year-end deadline. In local currency terms, both the FTSE 100 in the U.K. and the EuroStoxx 50 indices have fared better than the S&P 500 this month, falling 0.6 and 2.1 percent respectively, although those losses widen to 3.7 and 4.3 percent in dollar terms. And except for some volatility early in September, the Euro and pound have mostly traded in a narrow range versus one another for the past several months.

Important Disclosures:
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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An index is a statistical composite that is not managed. It is not possible to invest directly in an index.

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Past performance is not a guarantee of future results.

A 10-year Treasury note is a debt obligation issued by the United States government that matures in 10 years. The 10-year yield is typically used as a proxy for mortgage rates, and other measures.

The Purchasing Managers' Index (PMI) is an index of the prevailing direction of economic trends in the manufacturing and service sectors. It consists of a diffusion index that summarizes whether market conditions, as viewed by purchasing managers, are expanding, staying the same, or contracting. 

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