Updated: Dec 14, 2020
As we enjoy spending time with family and friends over the holiday, I’ll keep this week’s musings short-and-sweet. Our internal indicators are pointing to the potential for lower volatility going forward and the external evidence leaves us cautiously optimistic.
Blitz of Economic Releases Before Thanksgiving Day. Earlier in the week, we received some good news on the manufacturing front. The Chicago Fed National Activity Index showed a considerable jump to 0.83 in October from 0.32 in Sept. The Manufacturing PMI (preliminary) showed 56.7 for November vs 53.0 expected and versus 53.4 in October. The Services PMI (preliminary) also showed progress with a 57.7 posting for November versus 55 expected and 56.9 reading in October. The National Retail Federation announced that it is expecting Holiday Sales this year to grow between 3.6% and 5.2% over 2019’s holiday sales. That would be considerable given a year plagued by COVID. The Federation is also predicting online sales to rise year-over-year by between 20-30%. Personal Spending increased 0.5% for October versus 0.4% expected. Both the Case-Shiller Housing Index and New Home Sales showed considerable growth. The Case-Shiller Housing Price Index climbed 6.6% for Sept versus 5.3% in August. New Home Sales were 999k for October, which exceeded expectations by 29,000 and September’s number of 959k was revised higher to 1.002 million. Lastly, we have highlighted the Chicago Fed’s NFCI index from time-to-time as headline economic releases can sometimes confuse. The Index continued to show improvement in economic conditions here in the U.S. Last week the Index improved to -0.57, which is lowest the index has been since October 25th of last year. With the level of improvement in the NFCI, we would have to see a dramatic turn higher in the Index before we would even be worried about a potential double-dip recession. Another measure that we have incorporated into our Recession Probability Tool is the St. Louis Fed’s Financial Stress Index. That index is also at a comfortable level. The Index is historically at or close to 0 on average. It’s currently at -0.83, which means there’s little stress in financial markets currently.
Preview for 2021. While we haven’t formed our final expectations for markets in 2021, we have surveyed some of they key players and their expectations. The preview of 17 different economic and market metrics for 2020 draws similarities with 2016. The S&P 500 Index returned 21.83% in 2017, which would serve as a potential base case for 2021. The preview of the major institutions and analysts to see what they are predicting for 2021 reveals a similar outlook. So far, Goldman Sachs, JP Morgan, Citigroup, Morgan Stanley, & Credit Suisse have published their predictions for the S&P 500 for 2021. When we average those out, the year-end level for the S&P 500 is expected to be 4,175 (return of +16%). What this appears to reveal is a good case for a much better 2021. We expect is a less volatile year next year. When the S&P 500 Index goes through a highly volatile calendar year, that is typically followed up with a less volatile year (assuming we are not still in a recession like 2007-2008). The table below shows the number of 1% daily moves for the S&P 500 in a given calendar year. Hopefully, with vaccines being delivered over the next several weeks and states able to re-open again by year-end, a better, less volatile year could be in our future.
Sources: National Financial Conditions Index derived from the Federal Reserve Bank of Chicago (https://www.chicagofed.org/publications/nfci/index). Weekly Jobless Claims derived from the St. Louis Federal Reserve (https://fred.stlouisfed.org/series/ICSA). S&P 500 performance derived from Investing.com (https://www.investing.com/indices/us-spx-500).
All sectors and indices shown are unmanaged and investors cannot invest directly in any index. The graphs shown are for illustrative purposes only. Opinions and forecasts expressed herein may not actually occur. Performance data quoted represents past performance, which is not a guarantee of future results.
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