The Markets (third quarter through September 30, 2021)
Overall, the third quarter was a roller-coaster ride for the market. The Dow, the Russell 2000, the Nasdaq, and the Global Dow lost value, while the S&P 500 was able to eke out a quarterly gain. Treasury yields, the dollar, and crude oil prices ended the third quarter higher, while gold prices dipped lower. Financials, information technology, communication services, and health care ended the quarter in the black. Energy, industrials, and materials fell by at least 4.5%. Despite the downturns, the benchmark indexes remain well ahead of their 2020 closing values, led by the S&P 500, which ended the quarter nearly 15.0% over last year’s pace.
The yield on 10-year Treasuries fell 30 basis points. Crude oil prices increased $14.17 per barrel, or 24.0%, in the third quarter. The dollar lost nearly 1.0%, while gold prices advanced 3.6%. The national average retail price for regular gasoline was $3.175 per gallon on September 27, up from the August 30 price of $3.139 and higher than the June 28 price of $3.091.
July kicked off the third quarter with large caps outperforming small caps. The S&P 500, the Dow, and the Nasdaq advanced, reaching record highs along the way, while the small caps of the Russell 2000 fell over 3.5%. Treasury yields, the dollar, and crude oil prices also declined. Gold prices advanced. By the end of the month, over 80% of the S&P 500 companies that reported earnings exceeded expectations. COVID cases surged as the Delta variant spread across the country. Inflation figures continued to rise. The Consumer Price Index rose 0.9%, the Producer Price Index climbed 1.0%, both import and export prices advanced 1.0%, and retail sales increased 0.6%. The Federal Reserve noted that the economic recovery remained on track. Second-quarter gross domestic product advanced at an annualized rate of 6.5%, according to the initial estimate from the Bureau of Economic Analysis. Health care led the market sectors, followed by real estate, utilities, information technology, and communication services. Financials and energy lagged.
Equities continued their strong showing in August, recording several record highs during the month. Strong corporate earnings reports and improving economic conditions helped bolster investor confidence, despite the increasing prevalence of the Delta variant. Growth stocks outpaced value shares. Financials and communication services led the market sectors, while energy lagged. The Nasdaq paced the indexes, climbing 4.0%, followed by the S&P 500 (2.9%), the Russell 2000 (2.1%), the Global Dow (2.1%), and the Dow (1.2%). Ten-year Treasury yields jumped 7 basis points to close the month at 1.30%. The dollar rose by 0.6%, while crude oil prices fell 7.2% to $68.51 per barrel on the last business day of the month. Gold prices changed little, trading at $1,817.50 per ounce. The jobs sector improved, adding 943,000 new jobs. Wage gains were strong, while unemployment claims dipped.
Following a strong July and August, September saw the market struggle with volatility. Traders had other concerns to deal with, including slowing economic growth, elevated inflation, supply-chain disruptions, a global energy crunch, and China’s regulatory restrictions. In addition, investors are facing the prospects of the Federal Reserve beginning to wind down its stimulus measures. Each of the benchmark indexes lost value, with the Nasdaq falling more than 5.0% and the S&P 500 dipping 4.8%. Among the market sectors, energy climbed 8.5%, while the remaining sectors ended well in the red. Crude oil prices rose more than 9.0% to close the month over $75.00 per barrel. The dollar and 10-year Treasury yields advanced, while gold prices declined.
Stock Market Indexes
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.
Latest Economic Reports
Employment: The pace of job gains slowed in August, as 235,000 new jobs were added, well off the pace set in July (943,000) and June (938,000). Through the first eight months of the year, monthly job growth has averaged 586,000. The unemployment rate declined by 0.2 percentage point to 5.2% in August. The number of unemployed persons edged down to 8.4 million, following a large (782,000) decrease in July. Both measures are down considerably from their highs at the end of the February-April 2020 period. However, they remain above their levels prior to the COVID-19 pandemic (3.5% and 5.7 million, respectively, in February 2020). In August, notable job gains occurred in professional and business services (74,000), transportation and warehousing (53,000), private education (40,000), and manufacturing (37,000). Employment in retail trade declined 29,000. Among the unemployed, the number of permanent job losers declined by 443,000 to 2.5 million in August but is 1.2 million higher than in February 2020. The number of persons on temporary layoff, at 1.3 million, was essentially unchanged in August. The number of persons not in the labor force who currently want a job declined by 835,000 in August to 5.7 million but remains higher than the level in February 2020 (5.0 million). The labor force participation rate in August, at 61.7%, was unchanged over the month and has remained within a narrow range of 61.4% to 61.7% since June 2020. The employment-population ratio, at 58.5%, was little changed in August. This measure is up from its low of 51.3% in April 2020 but remains below the figure of 61.1% in February 2020. In August, 13.4% of employed persons teleworked because of the pandemic, little changed from the prior month. In August, 5.6 million persons reported that they had been unable to work because their employer closed or lost business due to the pandemic, which is up from 5.2 million in July. Average hourly earnings rose $0.17 to $30.73 ($0.11/$30.54 in July). Earnings have increased 4.3% since August 2020. The average work week in August was 34.7 hours, unchanged since June 2021.
The number of claims for unemployment insurance fell in September. According to the latest weekly totals, as of September 18 there were 2,802,000 workers receiving unemployment insurance benefits, down from the August 14 total of 2,862,000. The unemployment rate for the week ended September 18 was 2.0%, down 0.1 percentage point from the August 14 rate of 2.1%. During the week ended September 11, Extended Benefits were available in 9 states/territories: Alaska, California, Connecticut, the District of Columbia, Illinois, Nevada, New Jersey, New Mexico, and Texas; 44 states reported 1,059,248 continued weekly claims for Pandemic Unemployment Assistance benefits, and 46 states reported 991,813 continued claims for Pandemic Emergency Unemployment Compensation benefits.
FOMC/interest rates: The Federal Open Market Committee met in September. While noting that the economy has continued to recover, the ongoing spread of the coronavirus, particularly the Delta variant, may be slowing the pace of recovery. With the goals of maximum employment and inflation running at 2.0%, the Committee decided to maintain the current target range for the federal funds rate at 0.00%-0.25%. However, the FOMC indicated that it may begin scaling back its purchases of securities as early as this November.
GDP/budget: According to the third and final estimate from the Bureau of Economic Analysis, the economy accelerated at an annual rate of 6.7% in the second quarter of 2021 after advancing 6.3% in the first quarter. Consumer spending, as measured by personal consumption expenditures, increased 12.0% in the second quarter after rising 11.4% in the prior quarter. The personal consumption price index (prices for consumer goods and services) rose 6.5% in the second quarter after climbing 3.8% in the first quarter. Excluding food and energy, the price index increased 6.1%. In the second quarter, fixed investment climbed 3.3% following a 13.0% increase in the first quarter, and residential fixed investment fell 11.7% after increasing 13.3% in the first quarter. Exports rose 7.6% in the second quarter after decreasing 2.9% in the first quarter. Imports (which are a negative in the calculation of GDP) increased 7.1% in the second quarter (9.3% in the first quarter).
The Treasury budget deficit was $170.6 billion in August following the July deficit of $302.1 billion. Following the latest increase, the budget deficit through the first 11 months of the current fiscal year widened to $2.7 trillion, roughly 10.9% lower than last year’s deficit over the same period. Compared to last fiscal year, government expenditures have increased 4.0% to $6.3 trillion, while receipts have increased 18.0% to $3.6 trillion.
Inflation/consumer spending: Prices at the consumer level continued to advance in August. According to the latest Personal Income and Outlays report, consumer prices rose 0.4% in August after edging up 0.4% in July. Prices have increased 4.3% since August 2020. Excluding food and energy, consumer prices rose 0.3% in August (0.3% in July) and 3.6% since August 2020. Personal income increased 0.2% in August, while disposable (after-tax) personal income increased 0.1%. Consumer spending rose 0.8% in August following a -0.1% dip in July.
The Consumer Price Index climbed 0.3% in August following a 0.5% jump in July. Over the 12 months ended in August, the CPI rose 5.3%. Prices less food and energy rose 0.1% in August, the smallest increase since February 2021. Energy prices increased 2.0%, mainly due to a 2.8% rise in gasoline prices. Food prices increased 0.4% (0.7% in July), and new vehicle prices rose 1.2% (1.7% in July). Over the 12 months ended in August, energy prices have risen 25.0%, food prices have increased 3.7%, and prices for used cars and trucks have climbed 31.9%.
Prices that producers receive for goods and services continued to climb in August, increasing 0.7% after rising 1.0% in both June and July. Producer prices increased 8.3% for the 12 months ended in August, the largest yearly gain since November 2010 when 12-month data was first calculated. In August, prices for services rose 0.7% (1.1% in July), and prices for goods moved up 1.0% (0.6% in July). Producer prices less foods, energy, and trade services advanced 0.3% in August (0.9% in July) and have risen 6.3% since August 2020, the largest 12-month increase since August 2014.
Housing: Existing home sales fell 2.0% in August following two consecutive monthly gains. Over the past 12 months, existing home sales dropped 1.5%. The median existing-home price was $356,700 in August ($359,900 in July), up 14.9% from August 2020. Total housing inventory at the end of August dropped 1.5% from July’s supply and is down 13.4% from one year ago. In August, unsold inventory sat at a 2.6-month supply at the present sales pace, the same figure recorded in July but down from 3.0 months in August 2020. Sales of existing single-family homes also decreased in August, falling 1.9% after increasing 2.7% in July. Year over year, sales of existing single-family homes fell 2.8%. The median existing single-family home price was $363,800 in August, down from $367,000 in July.
New single-family home sales increased for the second consecutive month in August, advancing 1.5% after climbing 1.0% in July. Despite the recent monthly increases, sales of new single family homes have decreased 24.3% from August 2020. The median sales price of new single-family houses sold in August was $390,900 ($390,500 in July). The August average sales price was $443,200 ($446,000 in July). The inventory of new single-family homes for sale in August represents a supply of 6.2 months at the current sales pace, up slightly from the July revised estimate of 5.7 months.
Manufacturing: Industrial production increased 0.4% in August after advancing 0.8% (revised) the previous month. Late-month shutdowns related to Hurricane Ida held down the gain in industrial production by an estimated 0.3 percentage point. Manufacturing output rose 0.2% in August after rising 1.6% in July. In August, mining fell 0.6%, reflecting hurricane-induced disruptions to oil and gas extraction in the Gulf of Mexico. The output of utilities increased 3.3%, as warm temperatures boosted demand for air conditioning. Total industrial production in August was 5.9% higher than its year-earlier level and 0.3% above its pre-pandemic (February 2020) level.
New orders for durable goods increased 1.8% in August after advancing 0.5% in July (revised). Transportation drove the August increase, with new orders climbing 5.5% after decreasing 0.4% in July. Excluding transportation, new orders edged up 0.2%. Excluding defense, new orders advanced 2.4% after dipping 0.5% in July. New orders for nondefense aircraft and parts jumped 77.9% in August after falling 36.3% the previous month. Goods declined 8.0% following a 1.6% increase in July. New orders for capital goods reversed a 3.1% drop in July, increasing 6.7% in August. The advance was driven by a 9.0% rise in orders for nondefense capital goods. New orders for defense capital goods fell 8.3%.
Imports and exports: August import prices decreased for the first time since October 2020. The import price index declined 0.3% in August following increases of 0.4% in July and 1.1% in June. Import prices rose 9.0% over the 12 months ended in August (10.1% for the 12 months ended in July). This is the smallest 12-month increase since March 2021. Import fuel prices fell 2.3% in August — the first monthly decrease since October 2020. The August downturn in fuel prices was mostly driven by a 2.4% decline in petroleum prices. Despite the decline in August, import fuel prices advanced 56.5% for the year ended in August. Nonfuel import prices dipped 0.1% in August after ticking up 0.1% in July. Export prices increased 0.4% in August after increases of 1.1% in July and 1.2% in June. For the year ended in August, the price index for exports rose 16.8%. Agricultural export prices rose 1.1% in August following a 1.7% decline in July. Nonagricultural exports rose 0.2% in August after increasing 1.4% in July.
The international trade in goods deficit was $87.6 billion in August, up $0.8 billion, or 0.9%, from July. In August, exports increased $1.1 billion, or 0.7%, while imports rose $1.9 billion, or 0.8%. For the 12 months ended in August, exports have risen 25.6%, while imports have increased 17.8%.
The latest information on international trade in goods and services, out September 2, was for July and showed that the goods and services trade deficit decreased by 4.3% to $70.1 billion. July exports rose 1.3%, while imports declined 0.2%. Year over year, the goods and services deficit increased $131.0 billion, or 37.1%, from July 2020. Exports increased $205.0 billion, or 16.8%. Imports increased $336.0 billion, or 21.3%.
International markets: Whether it’s transitory or not remains to be seen, but several countries are experiencing accelerated inflation. Germany, Europe’s largest economy, saw inflation grow at a record pace in September, climbing 4.1% following a 3.4% jump in August. French inflation hit a near 10-year high of 2.7% in September. Like the case in many countries, surging energy prices are driving the inflation spike in France. Nevertheless, if inflation continues to climb, pressure will be on the European Central Bank to determine how to proceed with its asset purchases going forward. China, the world’s second largest economy, is attempting to contain the financial fallout from the default or bankruptcy of mega-developer Evergrande. Also last month, the People’s Bank of China, which has targeted bitcoin since 2013, declared that all crypto-related activities are illegal in China. For September, the STOXX Europe 600 Index fell about 3.8%; the United Kingdom’s FTSE declined 0.8%; Japan’s Nikkei 225 Index rose 3.5%; and China’s Shanghai Composite Index was essentially unchanged from August.
Consumer confidence: According to the latest report from The Conference Board, consumer confidence declined in September for the third consecutive month. The Consumer Confidence Index® stands at 109.3, down from 115.2 in August. The Present Situation Index, based on consumers’ assessment of current business and labor market conditions, fell to 143.4 in September from 148.9 the previous month. The Expectations Index, based on consumers’ short-term outlook for income, business, and labor market conditions, registered 86.6 in September, down from 92.8 in August. According to the report, consumer confidence waned, as the spread of the Delta variant deepened concerns over the state of the economy and short-term growth prospects. Nevertheless, consumer confidence is still high by historical levels, while these declines in confidence suggest consumers have grown more cautious and are likely to curtail spending going forward.
Eye on the Month Ahead
Heading into the fourth quarter of 2021, several economic indicators have improved, while a few have waned. Real estate and manufacturing slowed from the pace set earlier in the year. GDP posted strong data for the second quarter, although some estimates suggest that the third quarter will not be quite as strong. On the jobs front, there were nearly 11 million jobs available but nearly 8.7 million unemployed actively looking for work, further widening the gap between job openings and hires.
Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI, Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). News items are based on reports from multiple commonly available international news sources (i.e., wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Forecasts are based on current conditions, subject to change, and may not come to pass. U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The principal value of Treasury securities and other bonds fluctuates with market conditions. Bonds are subject to inflation, interest-rate, and credit risks. As interest rates rise, bond prices typically fall. A bond sold or redeemed prior to maturity may be subject to loss. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 largest, publicly traded companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. The U.S. Dollar Index is a geometrically weighted index of the value of the U.S. dollar relative to six foreign currencies. Market indices listed are unmanaged and are not available for direct investment.
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The Markets (second quarter through June 30, 2021)
The second quarter began with stocks making solid gains in April. COVID vaccines became available to more Americans. The federal government and several states pushed forward with reopening after relaxing many of pandemic-related constraints. Economic data was favorable and encouraging. The first-quarter gross domestic product accelerated at an annualized rate of 6.4%, claims for unemployment slowed, 266,000 new jobs were added, and manufacturing expanded. Price inflation expanded, although the Federal Reserve asserted that it would continue stimulus measures, even if inflation reached and exceeded the Fed’s 2.0% target. Each of the benchmark indexes listed here posted solid monthly gains, led by the Nasdaq (5.4%), followed by the S&P 500 (5.2%), the Global Dow (2.9%), the Dow (2.7%), and the Russell 2000 (2.1%). Bond prices increased, pulling yields lower. Crude oil prices ended April at $63.50 per barrel after increasing by more than 7.0% from March. The dollar slipped 2.1%, while gold prices rose 3.5%, closing April at $1,788.20 per troy ounce.
Stocks ended May with mixed returns, with the Global Dow (3.59%) and the Dow (1.93%) posting solid gains, while the Nasdaq fell 1.53%. Sector returns varied, with financials, energy, and materials gaining more than 3.0%, while consumer discretionary and information technology dipped more than 2.5%. Long-term Treasury yields decreased marginally, the dollar dropped 1.3%, while crude oil prices continued to climb, gaining nearly 5.0%. Overall, economic data was positive and confirmed that economic growth was accelerating, but not at the pace some may have anticipated. Labor added 266,000 new jobs, well below the nearly 1,000,000 figure some economists predicted. The number of job openings reached its highest level since 2000, which appears to point to a shortage of available workers rather than a slowdown in labor demand. Inflation was the buzzword throughout the month as consumer prices continued to climb, stoking fears that the Federal Reserve would cut back on stimulus measures in place. The personal consumption expenditures price index rose 0.6%, the Consumer Price Index climbed 0.8%, and producer prices increased 0.6%. Nevertheless, Fed officials repeated assurances that the price hikes were temporary due to “transitory supply chain bottlenecks.”
Economic recovery continued in June. Stocks closed the month generally higher, with only the Dow and the Global Dow lagging. Tech shares rebounded from a moderate dip in May to push the Nasdaq to a series of record highs in June. Bond prices rose, dragging yields lower. Yields on 10-year Treasuries declined nearly 10 basis points last month. Crude oil prices climbed nearly $7.00 per barrel. Information technology led the sectors, advancing nearly 7.0%, while materials, financials, and consumer staples lost value. The dollar rose, while gold prices dropped. June saw 559,000 new jobs added, with notable job gains in leisure and hospitality, health care and social assistance, and manufacturing. Inflationary pressures may be peaking as supply-chain pressures that had driven commodity prices higher over the past several months may be easing. Lumber prices fell from record highs and retail vehicle prices may have crested as wholesale auto prices slid. Investor confidence may have been boosted in June with the announcement by President Joe Biden of a bipartisan infrastructure spending package.
Overall, the second quarter was a good one for equities. The Nasdaq gained 9.5%, followed closely by the S&P 500 (8.2%), the Global Dow (4.9%), the Dow (4.6%), and the Russell 2000 (4.1%). Real estate, information technology, energy, and communication services all posted quarterly gains of more than 10.0% to lead the market sectors. Year to date, the Russell 2000 is well ahead of its 2020 year-end closing value, followed by the Global Dow, the S&P 500, the Dow, and the Nasdaq.
The yield on 10-year Treasuries fell 30 basis points. Crude oil prices increased $14.17 per barrel, or 24.0%, in the second quarter. The dollar lost nearly 1.0%, while gold prices advanced 3.6%. The national average retail price for regular gasoline was $3.091 per gallon on June 28, up from the May 31 price of $3.027 and 8.4% higher than the March 29 selling price of $2.852.
Stock Market Indexes
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.
Last Month’s Economic News
Employment: Job growth, while positive, is not meeting expectations. There were 559,000 new jobs added in May, below the level predicted by some economists (approximately 650,000). The April figure was revised up from 266,000 to 278,000 — still not quite as robust as had been estimated. Notable job growth in May occurred in leisure and hospitality (+292,000), in public and private education (+87,000), and in health care and social assistance (+45,800). In May, the unemployment rate declined 0.3 percentage point to 5.8%. In May, the number of unemployed persons fell by 496,000 to 9.3 million. These measures are down considerably from their recent highs in April 2020 but remain well above their levels prior to the pandemic (3.5% and 5.7 million, respectively, in February 2020). Among the unemployed, the number of persons on temporary layoff declined by 291,000 to 1.8 million. This measure is down considerably from the recent high of 18.0 million in April 2020 but is 1.1 million higher than in February 2020. In May, the number of persons not in the labor force who currently want a job was essentially unchanged at 6.6 million but is up by 1.6 million since February 2020. The number of employed persons who teleworked in May because of the pandemic fell to 16.6%, down from 18.3% in the prior month. In May, 7.9 million persons reported that they had been unable to work because their employer closed or lost business due to the pandemic. This measure is down from 9.4 million in April. In May, the labor force participation rate inched down 0.1 percentage point to 61.6%, and the employment-population ratio rose 0.1 percentage point to 58.0%. Average hourly earnings increased by $0.15 to $30.33 in May after increasing $0.21 in April. Average hourly earnings are up 2.0% from May 2020. In May, the average work week was 34.9 hours for the third month in a row.
Claims for unemployment insurance have maintained a fairly steady pace over the past few months. According to the latest weekly totals, as of June 12 there were 3,390,000 workers receiving unemployment insurance benefits, down marginally from the May 15 total of 3,642,000. The unemployment rate for the week ended June 12 was 2.4%, down 0.2 percentage point from the May 15 rate of 2.6%. During the week ended June 5, Extended Benefits were available in 12 states (14 states during the week of May 8); 51 states and territories reported 5,950,167 continued weekly claims for Pandemic Unemployment Assistance benefits (6,515,657 in May), and 51 states and territories reported 5,273,180 continued claims for Pandemic Emergency Unemployment Compensation benefits (5,191,642 in May).
FOMC/interest rates: The Federal Open Market Committee met in June. The FOMC offered no significant policy changes following that meeting, maintaining the federal funds target rate range at 0.00%-0.25%, while continuing the current quantitative easing monetary policies. There was a change in the Committee’s quarterly projections, led by a projected increase in the federal funds rate in 2023. The FOMC continued to stress that current inflationary pressures are transitory and are likely to moderate.
GDP/budget: According to the third and final estimate, the economy accelerated at an annual rate of 6.4% in the first quarter of 2021 after advancing 4.3% in the fourth quarter of 2020. Consumer spending, as measured by personal consumption expenditures, increased 11.4% in the first quarter after rising 2.3% in the prior quarter. Nonresidential (business) fixed investment climbed 11.7% following a 13.1% increase in the fourth quarter; residential fixed investment continued to advance, increasing 13.1% in the first quarter after climbing 36.6% in the previous quarter. Exports decreased 2.9% in the first quarter of 2021 after advancing 22.3% in the fourth quarter of 2020, and imports (which are a negative in the calculation of GDP) increased 6.7% in the first quarter (29.8% in the fourth quarter of 2020). Federal nondefense government expenditures climbed 45.0% following a fourth-quarter decline of 8.9% primarily due to added federal stimulus payments and aid.
The Treasury budget deficit was $132.0 billion in May, following the April deficit of $225.6 billion. Government receipts were $463.7 billion in May ($439.2 billion in April), while outlays in May totaled $595.7 billion ($664.8 billion in April). The deficit is 67.0% lower than it was in May 2020. The deficit for the first eight months of fiscal year 2021, at $2.064 trillion, is 9.8% higher than the same period in the previous fiscal year. Government receipts rose from $2.019 trillion last fiscal year to $2.607 trillion this year, while government outlays increased from $3.899 trillion to $4.671 trillion.
Inflation/consumer spending: Inflationary pressures continued to advance in May. According to the latest Personal Income and Outlays report, consumer prices edged up 0.4% in May after advancing 0.6% in both March and April. Prices have increased 3.9% since May 2020. Excluding food and energy, consumer prices rose 0.5% in May (0.7% in April) and 3.4% since May 2020. Personal income decreased 0.2% in May after falling 13.1% in April. Disposable personal income dropped 2.3% in May following a 14.6% drop in April. The drop in personal income in May generally reflected a decrease in government assistance benefits, as both economic impact payments to households and pandemic unemployment compensation payments to individuals lessened. Consumer spending was essentially unchanged in May from the previous month.
The Consumer Price Index climbed 0.6% in May following a 0.8% increase in April. Over the 12 months ended in May, the CPI rose 5.0% — the largest 12-month increase since a 5.4% increase for the period ended in August 2008. Core prices, excluding food and energy, advanced 0.7% in May and are up 3.8% over the last 12 months. Prices for used cars and trucks continued to rise sharply, increasing 7.3% in May. This increase accounted for about one-third of the overall CPI increase. Food prices increased 0.4% in May, the same increase as in April. Energy prices were unchanged in May.
Prices that producers receive for goods and services continued to climb in May, increasing 0.8% after advancing 0.6% in April. Producer prices increased 6.6% for the 12 months ended in May, the largest yearly gain since November 2010 when 12-month data was first calculated. Producer prices less foods, energy, and trade services rose for the thirteenth consecutive month after advancing 0.7% in May. Food prices rose 2.6% and energy prices increased 2.2% in May.
Housing: Over the past several months, residential sales have slowed. In May, sales of existing homes fell for the fourth consecutive month, declining 0.9% after decreasing 2.7% in April. Nevertheless, over the past 12 months, existing home sales increased 44.6%. The median existing-home price was $350,300 in May ($341,600 in April), up 23.6% from May 2020. Unsold inventory of existing homes represented a 2.5-month supply in May, slightly higher than the 2.4-month supply in April. Sales of existing single-family homes decreased 1.0% in May following a 3.2% drop in April. Year over year, sales of existing single-family homes rose 24.4%. The median existing single-family home price was $356,600 in May, up from $347,400 in April.
New single-family home sales declined in May for the second consecutive month. New home sales fell 5.9% in May, the same decrease as in April. Sales of new single-family homes have increased 9.2% from May 2020. The median sales price of new single-family houses sold in May was $374,400 ($372,400 in April). The May average sales price was $430,600 ($435,400 in April). The inventory of new single-family homes for sale in May represents a supply of 5.1 months at the current sales pace, up from the April estimate of 4.4 months.
Manufacturing: Industrial production increased 0.8% in May after advancing 0.7% the previous month. Manufacturing output increased 0.9% in May following a 0.4% increase in April. In May, mining increased 1.2% (0.7% in April) and utilities rose 0.2% (2.6% in April). Total industrial production in May was 16.3% higher than its year-earlier level, but it was 1.4% below its pre-pandemic (February 2020) level.
New orders for durable goods increased 2.3% in May after falling 0.8% in April. Transportation equipment, up following two consecutive monthly decreases, led the increase, climbing 7.6% in May. Excluding transportation, new orders increased 0.3% in May. Excluding defense, new orders rose 1.7%. New orders for capital goods advanced 4.2% in May following a 0.8% increase in April. New orders for nondefense capital goods increased 2.7% in May, while new orders for defense capital goods rose 17.4%.
Imports and exports: Both import and export prices rose in May for the sixth consecutive month. Import prices climbed 1.1% following a 0.8% advance in April. Import prices rose 11.3% over the 12 months ended in May, the largest 12-month advance since a 12.7% increase for the 12 months ended in September 2011. Import fuel prices increased 4.0% in May following a 1.6% jump in April. Import fuel prices advanced 109.6% for the year ended in May. Nonfuel import prices climbed 0.9% in May following a 0.7% advance in April. Export prices increased 2.2% in May after climbing 1.1% in April. For the year ended in May, the price index for exports rose 17.4%, the largest 12-month increase since the index was first published in September 1983. Agricultural export prices increased 6.1% in May following a 0.6% advance in April. Nonagricultural exports rose 1.7% in May after increasing 1.2% in April.
The international trade in goods deficit was $88.1 billion in May, up $2.4 billion, or 2.8%, from April. Exports dipped 0.3%, while imports rose 0.8%. For the 12 months ended in May, exports have risen 58.6%, while imports have increased 39.2%.
The latest information on international trade in goods and services, out June 8, is for April and shows that the goods and services trade deficit was $68.9 billion, 8.2% lower than the March deficit. April exports were $205.0 billion, or 1.1%, greater than March exports. April imports were $273.9 billion, or 1.4%, lower than March imports. Year over year, the goods and services deficit increased $94.5 billion, or 50.5%, from April 2020. Exports increased $42.0 billion, or 5.6%. Imports increased $136.4 billion, or 14.6%.
International markets: While the Federal Reserve continues to preach patience when it comes to rising inflationary pressures, other countries may not be waiting to respond. The Bank of Mexico increased its interbank rate 25 basis points to 4.25%, citing the jump in the U.S. Consumer Price Index. On the other hand, the Bank of England held its monetary policy stance unchanged, with the bank rate at 0.1%. Elsewhere, the Eurozone continued to reopen its economy, but at a slower pace than in the United States primarily due to the slower start of COVID-19 vaccinations. Eurozone manufacturing expanded in June. The IHS Markit Eurozone Composite PMI® increased from 57.1 in May to 59.2 in June. The Japanese economy has taken longer to recover. The au Jibun Bank Flash Japan Composite PMI® dropped 1.1 percentage point in June to 47.8, which remains in contraction territory. In the markets for June, the STOXX Europe 600 Index gained about 2.3%; the United Kingdom’s FTSE rose 1.1%; Japan’s Nikkei 225 index fell 0.2%; and China’s Shanghai Composite Index declined nearly 1.2%.
Consumer confidence: According to the latest report from the Conference Board, consumer confidence improved in June. The Consumer Confidence Index® advanced 7.3 percentage points in June to 127.3. The Present Situation Index, based on consumers’ assessment of current business and labor market conditions, increased from 148.7.9 in May to 157.7 in June. The Expectations Index, based on consumers’ short-term outlook for income, business, and labor market conditions, rose to 107.0 in June from May’s 100.9. According to the report, following June’s increase, consumer confidence is at its highest level since the onset of the pandemic in March 2020. Despite consumers’ expectations that short-term inflation will increase, this had little impact on consumers’ confidence or purchasing intentions.
Eye on the Month Ahead
Economic data for the second quarter in general, and for June in particular, was generally positive. Heading into the third quarter of the year, the first estimate of the second-quarter gross domestic product is available in July. The economy accelerated at an annualized rate of 6.4% in the first quarter. Employment data for June is also out this month. May saw 559,000 new jobs added and the unemployment rate dip to 5.8%.
Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI, Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). News items are based on reports from multiple commonly available international news sources (i.e., wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Forecasts are based on current conditions, subject to change, and may not come to pass. U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The principal value of Treasury securities and other bonds fluctuates with market conditions. Bonds are subject to inflation, interest-rate, and credit risks. As interest rates rise, bond prices typically fall. A bond sold or redeemed prior to maturity may be subject to loss. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 largest, publicly traded companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. The U.S. Dollar Index is a geometrically weighted index of the value of the U.S. dollar relative to six foreign currencies. Market indices listed are unmanaged and are not available for direct investment.
IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any matter addressed herein. Securities offered through DAI Securities, LLC, Member FINRA/SIPC. Financial Planning, Wealth Management and Tax Services offered through EagleStone Tax & Wealth. DAI Securities and EagleStone are not affiliated entities. Financial Planning, Investment & Wealth Management services provided through EagleStone Wealth Advisors, Inc. Tax & Accounting services provided through EagleStone Tax & Accounting Services.
The Markets (first quarter through March 31, 2021)
As we closed out 2020, the overwhelming sentiment entering January was that it couldn’t get much worse. Unfortunately, January did not start out on a high note. During the first week of the month, protesters stormed the United States Capitol, leading to violence, the disruption of the presidential election certification, and several deaths. Nevertheless, the inauguration of Joe Biden as our 46th president took place as scheduled. January also saw the emergence of virus mutations, the uneven distribution of COVID 19 vaccines, and the gradual relaxation of pandemic-related restrictions. Also during January, a new phenomenon in stock price manipulation emerged involving several companies, including a video-game company. Ultimately, stocks closed the month mixed, with the Russell 2000 and the Nasdaq gaining, while the Dow and the S&P 500 fell. Treasury yields, the dollar, and crude oil prices advanced.
Major equity indexes reached record highs in February, only to pull back by the end of the month. Fearful that inflationary pressures would mount, investors favored value stocks over growth, pushing small-cap and mid-cap stocks higher. Investors were encouraged by President Joe Biden’s $1.9 trillion stimulus proposal, accelerated vaccine distribution, and better-than-expected fourth-quarter corporate earnings. By the end of February, each of the benchmark indexes listed here posted gains led by the Russell 2000, which advanced more than 6.0%. The yield on 10-year Treasuries continued to grow, crude oil prices pushed past $61 per barrel, and the dollar rose. Only 50,000 new jobs were added in February, although unemployment claims decreased.
Stocks continued to push higher in March. Several of the benchmark indexes posted noteworthy gains including the Dow (6.6%), the S&P 500 (4.2%), and the Global Dow (4.0%). The Russell 2000 (0.9%) and the Nasdaq (0.4%) advanced moderately. Among the sectors, industrials (8.1%), utilities (7.4%), consumer staples (6.5%), and materials (6.4%) led the way. Treasury yields and the dollar advanced, while crude oil prices and gold fell.
Overall, the first quarter was definitely eventful. Additional federal stimulus payments lined many pocketbooks; a group of amateur traders banded together through social media to drive shares of a video gaming company to astronomical heights; interest rates jumped, stoking fears that inflationary pressures were rapidly building; and equities ultimately enjoyed robust returns. The small caps of the Russell 2000 gained nearly 12.5%, the Global Dow climbed 9.4% and the large caps of the Dow (7.8%) and the S&P 500 (5.8%) posted solid gains. Tech shares, which had driven the market for much of 2020, slumped during the quarter, but still gained enough ground to push the Nasdaq up by almost 3.0%. Energy shares posted some of the biggest gains in the quarter, with that market sector surging over 30.6%. Financials jumped 18.0%, followed by industrials (12.0%), materials (10.8%), and real estate (10.0%). Only information technology failed to advance by the end of the quarter. The yield on 10-year Treasuries climbed more than 80 basis points. Crude oil prices increased and the dollar rose. Gold prices fell nearly 10.0% in the first quarter. Year to date, the Russell 2000 is well ahead of its 2020 year-end closing value, followed by the Global Dow, the Dow, the S&P 500, and the Nasdaq.
The price of crude oil (CL=F) closed at $59.32 per barrel on March 31, lower than the February 26 price of $61.50 per barrel but well above the December 31 price of $48.52. The national average price of retail regular gasoline was $2.852 per gallon on March 29, up from the February 22 price of $2.633 and 27.0% higher than the December 28 selling price of $2.243. The price of gold finished March at $1,708.40 per ounce, lower than the February 26 price of $1,728.10 per ounce and significantly below its December 31 closing value of $1,893.10 per ounce.
Stock Market Indexes
Last Month’s Economic News
Employment: There were 379,000 new jobs added in February after only 49,999 new jobs were added in January. In February, the unemployment rate fell by 0.1 percentage point to 6.2%, and the number of unemployed persons decreased by 150,000 to 10.0 million. Although both measures are much lower than their April 2020 highs, they remain well above their pre-pandemic levels in February 2020 (3.5% and 5.7 million, respectively). Among the unemployed, the number of persons on temporary layoff decreased in February by 517,000 to 2.2 million. This measure is down considerably from the recent high of 18.0 million in April but is 1.5 million higher than its February 2020 level. In February, the number of persons not in the labor force who currently want a job, at 6.9 million, was little changed over the month but is 1.9 million higher than in February 2020. The number of employed persons who teleworked in February because of the coronavirus pandemic edged down to 22.7%, 0.5 percentage point lower than January. In February, 13.3 million persons reported that they had been unable to work because their employer closed or lost business due to the pandemic. This measure is 1.5 million lower than in January. February saw notable job growth in leisure and hospitality (355,000), although employment in that area is down by 3.5 million over the year. Job growth also occurred in food services and drinking places (286,000); trade, transportation; and utilities (49,000); health care and social assistance (45,600); and professional and business services (63,000). The labor force participation rate was unchanged at 61.4%, and the employment-population ratio inched up 0.1 percentage point to 57.6%. Average hourly earnings increased by $0.07 to $30.01 in February and are up 5.3% from a year ago. The average work week declined by 0.3 hour to 34.6 hours in February.
Claims for unemployment insurance continued to drop. According to the latest weekly totals, as of March 13, there were 3,870,000 workers receiving unemployment insurance benefits, down from the February 20 total of 4,419,000. The insured unemployment rate fell 0.4 percentage point to 2.7%. During the week ended March 6, Extended Benefits were available in 16 states (18 states during the week of February 6); 51 states and territories reported 7,735,491 continued weekly claims for Pandemic Unemployment Assistance benefits (7,518,951 in February), and 51 states and territories reported 5,551,215 continued claims for Pandemic Emergency Unemployment Compensation benefits (5,065,890 in February).
FOMC/interest rates: The Federal Open Market Committee met in March. According to the Committee statement, employment has turned up recently and, despite investor concerns, inflation continues to run well below 2.0%. The Committee continues to hold interest rates at their current 0.00%-0.25% target range and expects no change through 2023.
GDP/budget: The gross domestic product advanced at an annual rate of 4.3% in the fourth quarter of 2020. The GDP increased 33.4% in the third quarter after contracting 31.4% in the second quarter. Consumer spending, as measured by personal consumption expenditures, increased 2.2% in the fourth quarter after surging 41.0% in the third quarter. Nonresidential (business) fixed investment climbed 13.1% following a 22.9% increase in the third quarter; residential fixed investment continued to advance, increasing 36.6% in the fourth quarter after soaring 63.0% in the prior quarter. Exports advanced 22.3% in the fourth quarter (59.6% in the third quarter), and imports (which are a negative in the calculation of GDP) increased 29.8% in the fourth quarter (93.1% in the third quarter). Federal nondefense government expenditures decreased 8.9% in the fourth quarter following a third-quarter decline of 18.3% as federal stimulus payments and aid lessened. The GDP fell 3.5% in 2020 after increasing 2.2% in 2019. Personal consumption expenditures dropped 2.63%; nonresidential fixed investment declined 0.54%; residential fixed investment rose 0.23%; exports dropped 1.47%; imports rose 1.33%; and nondefense government spending advanced 0.15%.
The federal budget deficit was a larger-than-expected $310.9 billion in February, following January’s $162.8 billion deficit. The deficit is 32.0% higher than the February 2020 deficit of $235.3 billion. The deficit for the first five months of fiscal year 2021, at $1.047 trillion, is 68% higher than the first five months of the previous fiscal year. Through February, government outlays, at $559.2 billion, were 32.0% above the February 2020 figure, while receipts, at $248.3 billion, also increased 32.0%. The increase in government expenditures can be traced to a 125.0% jump in outlays for income security, an 859.0% increase in commerce and housing credits, and a 26.0% rise in health outlays.
Inflation/consumer spending: Inflationary pressures eased in February. According to the latest Personal Income and Outlays report, consumer prices edged up 0.2% in February after advancing 0.3% in January. Prices have increased 1.6% from February 2020. Excluding food and energy, consumer prices increased 1.4% over the last 12 months. Both figures are well below the Fed’s 2.0% target inflation rate. Personal income fell 7.1% in February after climbing 10.0% in January, and disposable personal income dropped 0.8% following January’s 11.4% jump. The decrease in personal income in February is more a reflection of stimulus payments received in January, which accounted for that month’s soaring income estimates. Consumer spending declined 1.0% in February after advancing 3.4% (revised) in January. Over the last 12 months, personal consumption expenditures (consumer spending) dipped 2.7%.
The Consumer Price Index climbed 0.4% in February following a 0.3% rise in January. Over the 12 months ended in January, the CPI rose 1.7%. Gasoline prices continued to increase, rising 6.4% in February and accounting for over half of the CPI increase. Consumer prices less food and energy rose 0.1% in February. The CPI less food and energy prices is up 1.3% over the past 12 months. Food prices rose 0.2% in February after edging up just 0.1% in January. In February, prices for apparel fell 0.7% after climbing 2.2% the prior month. Prices for new vehicles were unchanged in February, while prices for used cars and trucks dropped 0.9% for the second consecutive month.
Prices that producers receive for goods and services continued to climb in February, increasing 0.5% after advancing 1.3% in January. Producer prices increased 2.8% for the 12 months ended in February, which is the largest yearly gain since climbing 3.1% for the 12 months ended in October 2020. Producer prices less foods, energy, and trade services rose for the tenth consecutive month after advancing 0.2% in February. Food prices increased 1.3% in February after increasing 0.2% in January, while energy prices followed a 5.1% January increase by jumping 6.0% in February.
Housing: The housing sector retreated in February, likely due to dwindling inventory. Nevertheless, sales of existing homes fell 6.6% in February after rising 0.6% in January. Over the past 12 months, existing home sales increased 9.1%. The median existing-home price was $313,000 in February ($309,900 in January), up 15.8% from February 2020. Unsold inventory of existing homes fell 29.5% from February 2020 and represents a 2.0-month supply at the current sales pace, slightly better than January’s 1.9-month supply. Sales of existing single-family homes also dropped 6.6% in February after advancing 0.2% in January. Year over year, sales of existing single-family homes rose 18.6%. The median existing single-family home price was $317,100 in February, up from $308,300 in January.
New single-family home sales plunged in February. New home sales dropped 18.2% after climbing 4.3% in January. Sales of new single-family homes have increased 8.2% since February 2020. The median sales price of new single-family houses sold in February was $349,400 ($346,400 in January). The February average sales price was $416,000 ($408,800 in January). The inventory of new single-family homes for sale in February represents a supply of 4.8 months at the current sales pace, up from the January estimate of 4.2 months
Manufacturing: The manufacturing sector took a step backward last February as industrial production decreased 2.2%, the first such decline since last October. According to the Federal Reserve’s report, industrial production advanced 1.1% in January. Manufacturing output fell 3.1% in February following January’s 1.0% increase. Mining production dropped 5.4% in February after advancing 2.3% in January. February saw the output of utilities increase 7.4% after declining 1.2% the prior month. Total industrial production in February was 4.2% lower than its year-earlier level. According to the report, the severe winter weather in the south central region of the country in mid-February accounted for the bulk of the decline in output for the month.
For the first time in 10 months, new orders for durable goods decreased, falling 1.1% in February after climbing 3.5% in January. Transportation, down following five consecutive monthly increases, led the decrease, sliding 1.6%. New orders for nondefense capital goods rose 5.6% in February after increasing 6.2% the previous month. A 103.3% increase in nondefense (commercial) aircraft and parts drove the jump in nondefense capital goods. Defense capital goods followed a 0.9% January decline by nosediving 10.6% in February.
Imports and exports: Both import and export prices rose higher in February for the third consecutive month. Import prices climbed 1.3% in February following a 1.4% increase in January. Import prices rose 3.0% over the past year, the largest 12-month advance since increasing 3.4% from October 2017 to October 2018. Import fuel prices rose 11.1% in February following a 9.0% increase in January. The February rise was the largest advance since import fuel prices increased 15.2% in July 2020. Import fuel prices rose 6.5% over the past year, the first 12-month advance since a 13.2% increase in January 2020. Nonfuel import prices rose 0.4% in February following a 0.9% advance in January. Export prices increased 1.6% in February after climbing 2.5% in January. For the year ended in February, the price index for exports rose 5.2%, the largest 12-month increase since the index advanced 5.3% in June 2018. Agricultural export prices increased 2.9% in February following a 6.0% jump in January. Nonagricultural exports rose 1.5% in February after increasing 2.2% in January.
In February, the international trade in goods deficit was $86.7 billion, up 2.5% over January’s deficit. Exports fell 3.8% and imports declined 1.4%. For the 12 months ended in February, exports have fallen 5.4%, while imports have jumped 10.1%.
The latest information on international trade in goods and services, out March 5, is for January and shows that the goods and services trade deficit was $68.2 billion, 1.9% over the December deficit. January exports were $191.9 billion, or 1.0%, more than December exports. January imports were $260.2 billion, or 1.2%, more than December imports. Year over year, the goods and services deficit increased $23.8 billion, or 53.7%, from January 2020. Exports decreased $15.7 billion, or 7.6%. Imports increased $8.1 billion, or 3.2%.
International markets: Inflationary pressures may be ramping up globally. February saw consumer prices increase in several nations, including France, Germany, Italy, Canada, China, and Japan. In the markets, the EURO STOXX Europe 600 Index gained about 4.1% in March; the United Kingdom’s FTSE inched up 1.1%; Japan’s Nikkei 225 fell 1.3%; and China’s Shanghai Composite Index plunged nearly 4.0%.
Consumer confidence: The Conference Board Consumer Confidence Index® surged in March to its highest reading in a year. The index stands at 109.7, up from 90.4 in February. The Present Situation Index, based on consumers’ assessment of current business and labor market conditions, increased from February’s 89.6 to 110.0 in March. The Expectations Index, based on consumers’ short-term outlook for income, business, and labor market conditions, fell from 90.9 in February to 109.6 in March.
Eye on the Month Ahead
The economy in general, and the stock market in particular, should continue to progress as more vaccines are rolled out and more jobs are made available. Investors will continue to watch for signs of escalating inflation, despite the Federal Reserve’s forecasts to maintain interest rates at their present levels through 2023.
Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Forecasts are based on current conditions, subject to change, and may not come to pass. U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The principal value of Treasury securities and other bonds fluctuate with market conditions. Bonds are subject to inflation, interest-rate, and credit risks. As interest rates rise, bond prices typically fall. A bond sold or redeemed prior to maturity may be subject to loss. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. The U.S. Dollar Index is a geometrically weighted index of the value of the U.S. dollar relative to six foreign currencies. Market indices listed are unmanaged and are not available for direct investment.
Over the past 12 months, we have endured a global pandemic resulting in numerous deaths and hospitalizations, mass layoffs, a sinking economy, and a contentious presidential election. Our lives and lifestyles changed, where working and learning from home became the “new normal,” and in-person communication was replaced by virtual meetings. In short, 2020 was a very memorable year that tested our resolve, patience, and courage.
The year began with news of a SARS-like virus spreading in China. Little did we know the impact this contagion would impart on our health, politics, and economy. Late in January, the very first known case of COVID-19 in the United States involved a Washington state victim who had traveled from the city of Wuhan, China. By February, the growing number of reported cases of the virus prompted travel restrictions, stay-at-home orders, and shutting down of businesses both domestically and around the world. Aside from concern caused by the virus, we were consumed by the impeachment in February of President Trump, who was eventually acquitted by the Senate.
In March, the World Health Organization declared a global pandemic as the spread of the virus reached more than 100 countries, with more than 100,000 reported cases. By mid-March, President Trump declared a state of national emergency. World economies and stock markets were rocked by the spread of the COVID-19 virus, leading to major market sell-offs, plunging stocks well below their 2019 values. The U.S. first-quarter gross domestic product decelerated at a rate of -5%, only to be outdone by a second quarter deceleration of -31.4%. Fear became the motivating factor in our lives — fear of contracting the virus, fear of losing a loved one to the virus, fear of job loss, fear of economic failure, and fear of losing our money.
In response to the economic turmoil caused by the pandemic, several pieces of legislation were passed, including the Coronavirus Preparedness and Response Supplemental Appropriations Act, the Families First Coronavirus Response Act, and the massive COVID-19 rescue package, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which included the Paycheck Protection Program and distribution of stimulus checks to qualifying individuals. In May, focus shifted to the death of George Floyd, which sparked protests and confrontations across the country.
The summer months saw a slight lull in the number of reported virus cases. Economies began to marginally recover, some businesses began to reopen, and travel restrictions were relaxed. However, as the availability of testing for the virus increased, so did the number of reported cases. Following the Democratic and Republican national conventions, the campaign for the presidential election captured the focus of most Americans for the rest of the year, although COVID-19 seemed to cast a shadow over almost every aspect of our lives.
The November presidential election resulted in the defeat of President Donald Trump by former Vice President Joe Biden, with the post-election period dominated by attempts to overturn the results through federal courts and state legislatures. Some positive news came at the end of the year with the development and initial dissemination of COVID-19 vaccines and additional legislation that provided $900 billion in pandemic-related stimulus.
The new year brings with it a sense of hope: hope that the virus will be controlled; hope for a return to some form of normalcy in our daily lives; hope for economic prosperity and job security; and hope for peace, both here and around the world — and a good riddance to 2020.
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.
Snapshot 2020
The Markets
Equities: As with almost every aspect of 2020, the pandemic impacted the stock market throughout the year. Investors began hearing of the possible spread of the virus in January, creating uncertainty and trepidation. By the end of February, investors sold more equities than they purchased, driving values down. By the end of March, the spread of COVID-19 throughout much of the world and within the United States prompted a major market sell-off. The first quarter saw each of the benchmark indexes fall far below its 2019 closing value. Fiscal stimulus measures in April, coupled with value buying, drove stocks to their best month since 1987. The possibility of a COVID-19 vaccine, a brief slowdown in the number of reported virus cases, and the onset of the summer season provided enough encouragement for investors to stay in the market. Throughout the rest of the year, despite a resurgence in the number of reported COVID-19 cases and deaths, an historic number of unemployment claims, delays in the long-awaited vaccine, and additional stimulus, investors saw hope that the economy would turn the corner and that the virus would be contained. Those factors, coupled with the low interest-rate environment, made stocks a viable option.
On the last day of the year, the Dow and the S&P 500 ended at all-time highs. In fact, the fourth quarter was robust for stocks, with each of the major indexes posting double-digit gains, headed by the small caps of the Russell 2000, which surged to a gain of 31.3% over the prior quarter. Despite the turmoil and early-year losses, all of the benchmark indexes listed here closed 2020 well ahead of their 2019 closing marks. The tech stocks of the Nasdaq, which gained more than 43.0%, led the way, followed by the Russell 2000, the S&P 500, the Dow, and the Global Dow.
Bonds: U.S. Treasury yields generally trended lower in 2020, never reaching their 2019 year-end high of 1.91%. Muted inflation and low interest rates drove bond prices up and yields down. Ten-year Treasuries hit an all-time low of 0.3% in March as investors ran from stocks in favor of bonds. The impact of COVID-19 kept investors on edge as the economy drifted toward a recession. As parts of the economy began to slowly recover, investors again moved toward stocks and away from bonds, pushing yields higher. The yield on 10-year Treasuries ultimately closed 2020 at 0.91%, down 100 basis points from where it began the year.
Oil: Oil prices began 2020 at $63.05 per barrel, only to slump throughout the rest of the year. Oil demand declined drastically following COVID-19-related lockdowns and travel restrictions. An all-out oil price war in March and part of April drove prices below $20.00 per barrel. An agreement in mid April to cut petroleum output helped stabilize prices. For the year, crude oil prices averaged about $39.00 per barrel, ultimately closing at $48.44 per barrel on December 31.
FOMC/interest rates: The Federal Open Market Committee lowered interest rates dramatically in 2020 while instituting new and drastic measures in response to the economic turmoil caused by COVID-19. The year began with the target range for the federal funds rate at 1.50%-1.75%. However, due to the negative effects of COVID-19, the Federal Reserve cut the federal funds rate by 150 basis points to a range of 0.00%-0.25% in March. In addition, the Fed instituted a policy of unlimited bond buying, including the purchase of corporate bonds; $300 billion in new financing; and the establishment of two new facilities, the Term Asset-Backed Securities Loan Facility to enable the issuance of asset-backed securities, and a Main Street Business Lending Program to support lending to eligible small and medium-sized businesses. The target range for the federal funds rate stayed at 0.00%-0.25% through December and will likely remain there for most of 2021. The Fed also committed to continue increasing its holdings of Treasuries and mortgage-backed securities.
Currencies: The United States Dollar Index (DX-Y.NYB), which measures the U.S. dollar against the currencies of several other countries, hit a high of $102.99 in March. It closed at $89.91 on December 31, having fallen nearly 9.0% since the beginning of the year. The huge expansion of the national debt coupled with the continued impact of COVID-19 could keep the dollar from gaining upward momentum for quite some time.
Gold: Gold prices began the year at $1,524.50 and closed 2020 at $1,901.70, an increase of nearly 25.0%. During the year, gold fell to $1,450.90 in March, only to surge to $2,089.20 in mid-August. Investors turned to gold amid the growing uncertainty of COVID-19. A depreciating dollar and receding bond yields added to the appeal of gold for investors.
Last Month’s Economic News
Employment: Employment slowed in November with the addition of 245,000 new jobs, well below the totals for October (638,000) and September (661,000). The unemployment rate inched down 0.2 percentage point to 6.7% in November as the number of unemployed persons dipped from 11.1 million in October to 10.7 million in November. Despite the reduction in the number of unemployed persons, that figure is still 4.9 million higher than in February. Among the unemployed, the number of persons on temporary layoff decreased by 441,000 in November to 2.8 million. This measure is down considerably from the high of 18.1 million in April but is 2.0 million higher than its February level. In November, the number of persons not in the labor force who currently want a job increased by 448,000 to 7.1 million; this measure is 2.2 million higher than in February. In November, 21.8% of employed persons teleworked because of COVID-19, up from 21.2% in October. The labor force participation rate edged down to 61.5% in November; this is 1.9 percentage points below its February level. The employment-population ratio, at 57.3%, changed little over the month but is 3.8 percentage points lower than in February. Average hourly earnings increased by $0.09 to $29.58 in November and are up 4.4% from a year ago. The average work week remained unchanged at 34.8 hours in November.
Claims for unemployment insurance continued to drop in December. According to the latest weekly totals, as of December 19 there were 5,219,000 workers receiving unemployment insurance, down from the November 14 total of 6,071,000. The insured unemployment rate fell 0.5 percentage point to 3.6%. During the week ended December 12, Extended Benefits were available in 24 states; 51 states reported 8,459,647 continued weekly claims for Pandemic Unemployment Assistance benefits, and 51 states reported 4,772,853 continued claims for Pandemic Emergency Unemployment Compensation benefits.
FOMC/interest rates: The Federal Open Market Committee met in December. The FOMC decided to maintain the target range for the federal funds rate at 0.00%-0.25% and expects to maintain this range for the forseeable future until employment and inflation meet standards set by the Committee. In a statement released following its meeting, the Committee stressed that the COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. While economic activity and employment have continued to recover, those measures remain well below their levels at the beginning of the year. The Committee noted that weaker demand and earlier declines in oil prices have been holding down consumer price inflation. The FOMC also submitted its projections of the most likely outcomes for gross domestic product, the unemployment rate, and inflation for each year from 2020 to 2023 and over the longer-run. The projected longer run change in GDP is 1.6%-2.2%. The projected unemployment rate is 3.5%-4.5% over the longer range, and inflation is projected to run at 2.0%. The longer-range projection of the federal funds rate is 2.0%-3.0%.
GDP/budget: In contrast to the second-quarter gross domestic product, which fell 31.4%, the third-quarter GDP shows the economy advanced at an annual rate of 33.4%, as the country continued to rebound from the economic effects of the COVID-19 virus. Consumer spending, as measured by personal consumption expenditures, increased 41.0% in the third quarter, in contrast to a 33.2% decline in the second quarter. The increase in PCE accounted for 25.44% of the change in GDP. Nonresidential (business) investment vaulted 22.9% (-27.2% in the second quarter); residential fixed investment soared 63.0% after falling 35.6% in the prior quarter. Exports advanced 59.6% (-64.4% in the second quarter), and imports increased 93.1% (-54.1% in the second quarter). Federal nondefense government expenditures decreased 18.3% in the third quarter as federal stimulus payments and aid lessened.
November saw the federal budget deficit come in at a smaller-than-expected $145.3 billion, down roughly 30% from November 2019. However, the deficit for the first two months of fiscal year 2021, at $429.3 billion, is 25% higher than the first two months of the previous fiscal year. Through November, government outlays rose 9.0%, while receipts fell 3.0%. The rise in government expenditures for fiscal year 2021 is attributable to a 67% increase in outlays for income security, an 18% jump in outlays for health, and a 214% climb in community and regional development payments. Medicare outlays fell about 15% compared to the same period last year.
Inflation/consumer spending: The COVID-19 pandemic clearly impacted personal income and spending in November. According to the latest Personal Income and Outlays report, personal income and disposable personal income decreased 1.1% and 1.2%, respectively, after decreasing 0.6% and 0.7% in October. Consumer spending fell 0.4% in November after increasing 0.3% the previous month. Inflation remained muted as consumer prices were unchanged in November and October. Consumer prices have increased by a mere 1.1% over the last 12 months ended in November.
The Consumer Price Index climbed 0.2% in November after being unchanged in October. Over the 12 months ended in November, the CPI rose 1.2%. The prices for lodging away from home, household furnishings and operations, recreation, apparel, airline fares, and motor vehicle insurance increased in November. Prices for used cars and trucks, medical care, and new vehicles declined over the month. Increases in shelter and energy were major factors in the CPI increase. Core prices (less food and energy) increased 0.2% in November and are up 1.6% over the 12 months ended in November.
Prices that producers receive for goods and services rose 0.1% in November following a 0.3% October jump. Producer prices increased 0.8% for the 12 months ended in November, the largest advance since moving up 1.1% for the 12 months ended in February. Producer prices less foods, energy, and trade services rose for the seventh consecutive month after advancing 0.1% in November. For the 12 months ended in November, prices less foods, energy, and trade services moved up 0.9%, the largest rise since a 1.0% increase for the 12 months ended in March.
Housing: Sales of existing homes fell in November after advancing in each of the previous five months. Existing home sales dropped 2.5% in November but are up 25.8% from a year ago. The median existing-home price was $310,800 in November ($313,000 in October). Unsold inventory of existing homes represents a 2.3-month supply at the current sales pace, a record low. Sales of existing single-family homes fell 2.4% in November following a 4.1% jump in October. Over the last 12 months, sales of existing single-family homes are up 25.6%. The median existing single-family home price was $315,500 in November, down from $317,700 in October.
New single-family home sales continued to slide, dropping 11.0% in November after falling 0.3% in October. The median sales price of new single-family houses sold in November was $335,300 ($330,600 in October). The November average sales price was $390,100 ($386,200 in October). The inventory of new single-family homes for sale in November represents a supply of 4.1 months at the current sales pace, up from the October estimate of 3.6 months.
Manufacturing: Industrial production has risen to within 5.0% of its pre-pandemic (February) level after increasing 0.4% in November. By comparison, industrial production in April was 16.5% below its February level. Manufacturing output rose 0.8% in November, marking the seventh consecutive month of gains. An increase of 5.3% for motor vehicles and parts contributed significantly to the gain in factory production; excluding motor vehicles and parts, manufacturing output moved up 0.4%. In November, utilities declined 4.2% as unusually warm temperatures reduced demand. Mining production increased 2.3% in November after falling 0.7% in October. In November, total industrial production was 5.5% lower than a year earlier.
For the seventh consecutive month, new orders for durable goods increased in November, climbing 0.9% following a 1.8% jump in October. Despite the trend of monthly increases, new orders for manufactured durable goods were 8.0% lower than a year ago. Excluding transportation, new orders increased 0.4% in November (+1.3% in October). Excluding defense, new orders increased 0.7% in November (+0.2% in October). Transportation equipment, up in six of the last seven months, led the increase, climbing 1.9% in November (+1.5% in October).
Imports and exports: Both import and export prices inched higher in November. Import prices rose 0.1% after falling 0.1% in the prior month, an increase largely driven by higher fuel prices. Import prices excluding fuel dropped 0.3% in November. Despite the recent increases, prices for imports decreased 1.0% from November 2019 to November 2020. Export prices advanced 0.2% in November after declining 0.1% in October. Overall, export prices dipped 1.3% over the past year. Agricultural export prices rose 2.2% in November, while nonagricultural prices for items such as consumer goods, automobiles, and industrial supplies and materials were unchanged, but are down 1.6% during the 12 months ended in November.
The international trade in goods deficit was $84.8 billion in November, up $4.4 billion, or 5.25%, from October. Exports of goods were $127.2 billion in November, $1.1 billion, or 0.8%, more than in October. Imports of goods were $212.0 billion in November, $5.5 billion, or 2.6%, more than in October. Driving exports higher in November were foods, feeds, and beverages (4.3%), and industrial supplies (1.5%). After increasing 5.9% in October, exports of consumer goods inched up 0.8% in November. Imports of industrial supplies (2.9%), consumer goods (6.7%), and other goods (4.0%) pushed total imports higher in November. Imports of automotive vehicles fell 3.2% in November after rising 3.2% in October.
The latest information on international trade in goods and services, out December 4, is for October and shows that the goods and services trade deficit was $63.1 billion, an increase of nearly $1.0 billion, or 1.7%, over the September deficit. October exports were $182.0 billion, or 2.2%, more than September exports. October imports were $245.1 billion, or 2.1%, more than September imports. Year to date, the goods and services deficit increased $46.6 billion, or 9.5%, from the same period in 2019. Exports decreased $345.9 billion, or 16.4%. Imports fell $299.4 billion, or 11.5%.
International markets: A mutant strain of COVID spread rapidly though parts of Europe late in the year, sending stocks reeling as several affected countries tightened restrictions. This latest development will likely stall what had been a recovering European economy. Industrial production and retail sales had been approaching pre-pandemic levels in several European nations. The United Kingdom and the European Union reached a trade agreement as Brexit nears its final stages. In China, the third-quarter GDP advanced 2.7% and is 4.9% higher year-over-year.
Consumer confidence: The Conference Board Consumer Confidence Index® declined in December for the third consecutive month. The index stands at 88.6, down from 92.9 in November. The Present Situation Index, based on consumers’ assessment of current business and labor market conditions, decreased sharply from 105.9 to 90.3. However, the Expectations Index — based on consumers’ short-term outlook for income, business, and labor market conditions — increased from 84.3 in November to 87.5 in December.
Eye on the Year Ahead
The year 2021 should bring continued economic recovery. As the United States and the world inch slowly toward normalcy following the battle against the COVID-19 pandemic, stock markets, employment, and production should also advance.
Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. The U.S. Dollar Index is a geometrically weighted index of the value of the U.S. dollar relative to six foreign currencies. Market indices listed are unmanaged and are not available for direct investment.
The Markets (third quarter through September 30, 2020)
July kicked off the third quarter with a bang as stocks surged throughout much of the month. Investors were encouraged by solid employment growth, a rise in personal income and consumer spending, a surge in the housing sector, and an increase in industrial production. All news was not positive, however. The second-quarter gross domestic product fell more than 31% and many states saw an increase in the number of reported COVID-19 cases. Nevertheless, investors stayed with equities, pushing values higher for the fourth consecutive month. Tech stocks drove the Nasdaq to a 6.8% gain, followed by the S&P 500 (5.5%), the Global Dow (3.5%), the small caps of the Russell 2000 (2.7%), and the Dow (2.4%). Treasury bond prices climbed, sending yields lower in July. Crude oil prices settled at $40.40 per barrel, nearly $1.00 ahead of their June closing values. Gold prices closed July at $1,990.00, about 11% higher than June’s closing price.
The positive run for stocks continued in August, as each of the benchmark indexes listed here advanced notably. The Nasdaq climbed nearly 9.6%, the Dow rose 7.6%, the S&P 500 advanced 7.0%, the Global Dow vaulted 6.0%, and the Russell 2000 gained 5.5%. Crude oil and gas prices rose marginally, while the price of gold fell. Throughout the month, states struggled to settle on appropriate protocols for reopening schools. Testing for the virus increased, and the number of reported COVID-19 cases and deaths rose.
September saw stocks fall on waning hopes of a second round of stimulus. Also, discord between the United States and China ramped up following President Trump’s threatened recourse against American companies that create jobs overseas or that do business with China. Technology shares took a sizable hit, particularly early in the month. September saw several days of favorable returns, likely due to bargain hunters. Unfortunately, there wasn’t enough buyers to prevent the benchmark indexes from falling lower by the end of each week of the month. September saw each of the indexes fall, led by the Nasdaq (-5.2%), followed by the Global Dow (-4.3%), the S&P 500 (-3.92%), the Russell 2000 (-3.45%), and the Dow (-2.28%).
Overall, the third quarter of 2020 produced the second consecutive quarter of notable market gains. Of the benchmark indexes listed here, the Nasdaq again proved the strongest, climbing more than 11.0% for the quarter, followed by the large caps of the S&P 500 and the Dow, which gained 8.5% and 7.6%, respectively. The Global Dow advanced 5.0% for the quarter, and the small caps of the Russell 2000 ended the quarter up 4.6%.
Year to date, the Nasdaq remains well ahead of its 2019 year-end closing value, while the S&P 500 is more than 4.0% over last year’s closing mark. The remaining benchmarks continue to gain ground, with the closest to its year-end value being the Dow, followed by the Global Dow and the Russell 2000.
By the close of trading on September 30, the price of crude oil (CL=F) closed at $39.64 per barrel, below the August 31 price of $42.81 per barrel and slightly higher than the June 30 price of $39.35. The national average retail regular gasoline price was $2.169 per gallon on September 28, down from the August 31 price of $2.222 and lower than the June 28 selling price of $2.174. The price of gold finished September at $1,891.80 per ounce, lower than the August 31 price of $1,940.60 per ounce but higher than its June 30 closing value of $1,798.80 per ounce.
Stock Market Indexes
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.
Latest Economic Reports
Employment: Employment increased by 1.4 million in August after adding 1.8 million jobs in July. These improvements in the labor market reflected the continued resumption of economic activity that had been curtailed due to the COVID-19 pandemic and efforts to contain it. Nevertheless, the number of job gains in August is 7.6% below the pre-pandemic level of February, which saw 11.5 million new jobs added. In August, notable job gains occurred in leisure and hospitality, government, retail trade, professional and business services, and education and health services. The unemployment rate dropped 1.8 percentage points to 8.4% for August as the number of unemployed persons dropped by 2.8 million to 13.6 million. These measures remain well above their pre-pandemic February figures of 4.9% and 7.8 million, respectively. In August, average hourly earnings rose by $0.11 to $29.47. Average hourly earnings increased by 4.7% over the last 12 months ended in August. The average workweek increased by 0.1 hour to 34.6 hours in August. The labor participation rate increased 0.3 percentage point to 61.7%. The employment-population ratio rose by 1.4 percentage points to 56.5%.
Claims for unemployment insurance continue to drop in September. According to the latest weekly totals, as of September 19 there were nearly 11.8 million workers still receiving unemployment insurance. The insured unemployment rate was 8.1% (9.9% as of August 15). The highest insured unemployment rates in the week ended September 12 compared to their respective rates on August 8 were in Hawaii (21.3% vs 19.8%), California (16.1%, unchanged), Nevada (14.7% vs 17.3%), New York (13.7% vs 15.4%), Puerto Rico (12.8% vs 19.2%), Louisiana (12.6% vs 13.5%), Georgia (12.2% vs 12.6%), and the Virgin Islands (11.9% vs 12.8%). During the week ended September 12, 50 states reported 11.8 million individuals claiming Pandemic Unemployment Assistance benefits and 50 states reported 1.8 million individuals claiming Pandemic Emergency Unemployment Compensation benefits.
FOMC/interest rates: The Federal Open Market Committee (FOMC) voted to maintain the federal funds rate range at 0.00%-0.25% following the Committee’s September meeting. The FOMC expects to maintain this target range until labor market conditions have reached maximum employment and inflation has risen to at least 2.0%, or exceeds 2.0% for some time. The Committee noted that, although economic activity and employment have picked up in recent months, they remain well below their levels at the beginning of the year. The FOMC predicted that the path of the economy will depend on the course of COVID-19, which will continue to weigh on economic activity, employment, and inflation in the near term, while posing considerable risks to the economic outlook over the medium term.
GDP/budget: According to the third and final estimate for second-quarter gross domestic product, the economy decelerated at an annualized rate of 31.4%. GDP decreased 5.0% in the first quarter. Stay-at-home orders issued in March and April in response to the COVID-19 pandemic greatly impacted the economy. Consumer spending was a big drag, falling 33.2%, reeling from the initial effects of the pandemic. Fixed investment fell 29.2% in the second quarter (-1.4% in the first quarter), and nonresidential fixed investment dropped 27.2% in the second quarter, compared to a 6.7% decline in the prior quarter. Exports were down 64.4%, and imports sank 51.1%. Nondefense government expenditures increased 37.6% due to stimulus spending programs initiated in response to the pandemic.
The monthly Treasury budget deficit for August was $200 billion, essentially equal to the August 2019 monthly deficit. Through 11 months of the fiscal year, the government deficit sits at $3.007 trillion, a 182% increase over the same period from the previous fiscal year. Government outlays for the current fiscal year are 46% greater than expenditures for fiscal year 2019.
Inflation/consumer spending: According to the Personal Income and Outlays report for August, personal income decreased 2.7% and disposable (after-tax) personal income dropped 3.2% after advancing 0.4% and 0.2%, respectively, in July. Consumer spending increased in August, climbing 1.0% for the month, well short of July’s 6.2% advance. Inflation remained somewhat muted as consumer prices inched ahead by 0.3% in August after increasing 0.4% in July. Consumer prices have increased by a mere 1.4% over the last 12 months.
Consumer prices continued to slowly increase in August. Prices for goods and services rose 0.4% in August, marking the third consecutive monthly increase. Over the last 12 months ended in August, consumer prices are up 1.3%. Contributing to August’s increase in consumer prices was a sharp rise in prices for used cars and trucks, which climbed 5.4%. Also increasing were prices for fuel oil (3.9%), gasoline (2.0%), and energy (0.9%). Food prices rose 0.1%.
Prices that producers receive for goods and services rose 0.3% in August after climbing 0.6% in July. Producer prices are down 0.2% over the last 12 months ended in August. A 0.5% spike in prices for services pushed producer prices higher. Prices for goods inched up 0.1%.
Housing: The housing sector continued to post strong sales numbers in August. Sales of existing homes jumped 2.4% last month after climbing 24.7% in July. Over the 12 months ended in August, existing home sales are up 10.5%. The median existing-home price in August was $310,600 ($304,100 in July). Unsold inventory of existing homes represents a 3.0-month supply at the current sales pace, down slightly from 3.1 months in July. Sales of existing single-family homes increased 1.7% in August following a 23.9% jump in July. Over the last 12 months, sales of existing single-family homes are up 11.0%. The median existing single-family home price was $315,000 in August, up from $307,800 in July.
After climbing 13.9% in July, sales of new single-family homes surged again in August, increasing 4.8%
for the month. The median sales price of new houses sold in August was $312,800 ($330,600 in July).
The August average sales price was $369,000 ($391,300 in July). August’s inventory of new
single-family homes for sale represents a supply of 3.3 months at the current sales pace, down from
July’s estimate of 4.0 months.
Manufacturing: Total industrial production rose 0.4% in August after increasing 3.0% in July. Although industrial production has risen in each of the past four months, it has remained 7.3% below its pre-pandemic February level. Manufacturing output continued to improve in August, rising 1.0% (3.4% advance in July). Most major industries posted increases, but gains have gradually slowed since June. Mining production fell 2.5% in August, as Tropical Storm Marco and Hurricane Laura caused sharp but temporary drops in oil and gas extraction and well drilling. The output of utilities moved down 0.4%. Overall, the level of total industrial production was 7.7% lower in August than it was a year earlier.
For the fourth consecutive month, new orders for durable goods increased in August, climbing 0.4% following an 11.7% jump in July. Despite the trend of monthly increases, new orders for manufactured durable goods are 11.3% lower than a year ago. Excluding transportation, new orders increased 0.4% in August. Excluding defense, new orders increased 0.7%. Machinery, also up four consecutive months, led the August increase, advancing 1.5%. Nondefense new orders for capital goods in August increased 7.8%.
Imports and exports: The price index for U.S. imports rose 0.9% in August, following a 0.7% jump in July. Higher prices for both fuel (+3.3%) and nonfuel (+0.7%) imports contributed to the August increase. The rise in nonfuel prices was the largest since April 2011. Driving the nonfuel price increase was a 3.6% rise in prices for industrial supplies and materials. Prices for U.S. exports also rose in August, rising 0.5% after increasing 0.9% in July.
The international trade in goods deficit was $82.9 billion in August, up $2.8 billion, or 3.5% over July. Exports of goods for August were $118.3 billion, 2.8% more than July exports. Imports of goods for August were $201.3 billion, or 3.1% more than July imports. Exports of industrial supplies increased 10.6% in August. Imports of consumer goods climbed 7.0% in August.
The latest information on international trade in goods and services, out September 3, is for July and shows that the goods and services trade deficit was $63.6 billion, an increase of nearly $10.0 billion, or 18.9%, over the June deficit. July exports were $168.1 billion, or 8.1% more than June exports. July imports were $231.7 billion, or 10.9% more than June imports. Year to date, the goods and services deficit increased $6.4 billion, or 1.8%, from the same period in 2019. Exports decreased $257.8 billion, or 17.5%. Imports decreased $251.3 billion, or 13.8%.
International markets: Europe saw an increase in COVID-19 cases reported, likely impacting stocks. STOXX Europe 600 index lost value by the end of September, Germany’s DAX Performance index fell, while the UK’s FTSE 100 was flat. France, Spain, and the United Kingdom took steps to stem the latest wave of virus cases. Stocks in China fell as the Shanghai Composite index and CSI 300 lost value. On the economic front, Japan’s purchasing managers index remains in contraction territory as calls increase for new stimulus from the Bank of Japan.
Consumer confidence: The Conference Board Consumer Confidence Index® increased in September after declining in August. The index stands at 101.8, up from 86.3 in August. The Present Situation Index, based on consumers’ assessment of current business and labor market conditions, increased from 85.8 to 98.5. The Expectations Index, which is based on consumers’ short-term outlook for income, business, and labor market conditions, increased from 86.6 in August to 104.0 in September.
Eye on the Month Ahead
The economy is expected to continue its slow, upward trend in October. The market took a hit in September but showed signs of recovering toward the end of the month. Certainly, the run for the presidency will garner increasing attention and influence the economy in general and the stock market in particular.
Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI, Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). News items are based on reports from multiple commonly available international news sources (i.e., wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 largest, publicly traded companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. The U.S. Dollar Index is a geometrically weighted index of the value of the U.S. dollar relative to six foreign currencies. Market indices listed are unmanaged and are not available for direct investment.
The Markets (first quarter through March 31, 2020)
The world’s economies and stock markets have been rocked by the spread of COVID-19. Investors’ fears prompted a major sell-off in February and March, plunging stocks well below their 2019 closing marks. Nevertheless, 2020 started off in a positive way. Following a strong 2019, stocks were slow to move forward as investors cashed in some of their 2019 gains. But by mid-January, each of the benchmark indexes were safely ahead of their 2019 closing marks. However, concerns over the COVID-19 outbreak in China quelled investor optimism. By the end of January, only the small caps of the Nasdaq remained ahead of their prior year’s pace, as each of the remaining indexes listed here fell into the red.
February started off as January ended, with investors more inclined to sell rather than buy equities. However, word of China’s plans to cut tariffs on some U.S. imports sent stocks higher during the second week of the month. The Nasdaq was more than 6% over its 2019 year-end value while both the S&P 500 and the Dow also pushed ahead. But by the third week of February, the impact of the virus was becoming evident with news of a widespread outbreak in South Korea. Selling accelerated the following week as outbreaks were reported in Iran and Italy. As more cases were reported in the United States, investors feared that containment of the virus was not likely and rushed to cash in stocks. By the end of February, each of the indexes lost significant value led by the Dow, which fell more than 10% for the month.
March 2020 will surely go down as one of the most turbulent months. COVID-19 continued to spread worldwide. In the United States, confirmed cases and, unfortunately, deaths spiraled. Fear became the motivating factor in our daily lives — fear of catching the virus, fear of the illness affecting our loved ones, fear of losing our jobs, fear of economic failure, and fear of losing our money. With respect to the stock market, this fear manifested itself in a major sell-off for most of the month. After falling sharply during the last week of February, stocks rebounded marginally to open the month. But that push was short-lived as stocks plummeted dramatically mid-March, despite the announcement of new actions and legislation by the Federal Reserve, Congress, and the President. On March 20, each of the benchmark indexes listed here posted double-digit losses. Year to date, the major indexes were more than 20% behind their 2019 closing values. The passage of the CARES Act at the end of the month helped ease investors’ concerns enough to move back to stocks. The end of the month saw each of the benchmark indexes post major gains, with the Dow marking its best single day since 1938. However, the spike in index values was not nearly enough to offset the major losses sustained throughout the month. March saw the Dow fall almost 14%, the S&P 500 drop over 12%, the Nasdaq lose 10%, the Global Dow give back close to 15%, and the small caps of the Russell 2000 plunge nearly 22%.
The first quarter of 2020 closed with each of the benchmark indexes securely in the red compared to their 2019 year-end values. The Russell 2000 again suffered the largest three-month fall, closing the quarter down nearly 31%. The Dow suffered its worst quarter since 1987, while the broader-based S&P 500 hasn’t seen a quarterly decline this bad since 2008. The Nasdaq fell more than 14%, marking its worst quarter since 2018. The Global Dow fell over 24% for the quarter.
By the close of trading on March 31, the price of crude oil (WTI) had sunk to $20.35 per barrel, well below the February 28 price of $45.19 per barrel. The national average retail regular gasoline price was $2.120 per gallon on March 23, down from the February 24 selling price of $2.466 and $0.503 less than a year ago. The price of gold finished March at $1,591.20, slightly higher than its February closing value of $1,585.80.
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.
Latest Economic Reports
Employment: Employment rose by 273,000 in February after adding 225,000 new jobs in January. In 2019, job growth averaged 178,000 per month. Notable job gains occurred in health care and social assistance, food services and drinking places, government, construction, professional and technical services, and financial activities. The unemployment rate dropped 0.01 percentage point to 3.5% for the month as the number of unemployed persons dropped by close to 100,000 to 5.8 million. In February, average hourly earnings for all employees rose by $0.09 to $28.52. Average hourly earnings increased by 3.0% over the last 12 months ended in February. The average workweek rose by 0.1 hour to 34.4 hours in February. The labor participation rate for February was 63.4%, the same as in the previous month. The employment-population ratio was 61.1% last month (61.2% in January).
FOMC/interest rates: The Federal Open Market Committee held several emergency meetings in March, dropping the target range for the federal funds rate 150 basis points to 0.00%-0.25%. To further combat the economic impact of COVID-19, the Committee proffered a number of new and drastic measures. Among the actions taken by the Fed are unlimited bond buying including the purchase of corporate bonds; $300 billion in new financing; and the establishment of two new facilities, the Term Asset-Backed Securities Loan Facility to enable the issuance of asset-backed securities, and a Main Street Business Lending Program to support lending to eligible small and medium-sized businesses.
GDP/budget: According to the third and final estimate for the fourth-quarter gross domestic product, the economy accelerated at an annualized rate of 2.1%, the same rate as in the third quarter. Consumer spending grew at a rate of 1.8% (3.2% in the third quarter), fixed investment fell 0.6% in the fourth quarter (-0.8% in the third quarter), and nonresidential fixed investment dropped 2.4% in the fourth quarter, compared to a 2.3% decline in the prior quarter. Consumer prices advanced at a rate of 1.4% in the fourth quarter, comparable to the third quarter (1.3%).
– Last February saw a budget deficit of $235 billion. Through the first five months of the 2020 fiscal year, the deficit sits at $624.5 billion, 14.8% greater than the deficit over the same period last fiscal year. Compared to the same period last year, government spending climbed 9.2%, far exceeding receipts, which rose 7.0%. In February, the largest expenditures were for Social Security ($91 billion), income security ($91 billion), national defense ($55 billion), and Medicare ($52 billion). On the income side of the ledger, social insurance and retirement accounted for $100 billion and individual income taxes totaled $70 billion.
Inflation/consumer spending: According to the Personal Income and Outlays report for February, personal income rose 0.6% for the month, the same advance as in the previous month. Disposable, or after-tax, income increased 0.5% after increasing 0.6% in January. Consumer spending rose 0.2% in February for the second consecutive month. Price inflation remained low, however, as consumer prices inched ahead 0.1% for the third month in a row. Over the last 12 months, consumer prices are up 1.8%.
– The Consumer Price Index inched ahead 0.1% in February, the same increase as in January. Year to date, consumer prices are up 2.3%. Increases in prices for shelter (which makes up the largest portion of overall consumer costs) climbed 0.3% in February following the same 0.3% increase in January. Energy prices dropped 2.0% in February after falling 0.7% in January. Gas prices plummeted 3.4% while fuel oil prices decreased 8.5%.
– Prices producers receive for goods and services fell 0.6% after advancing 0.5% in January. The index has increased 1.3% since last February. Producer prices less foods, energy, and trade services inched down 0.1% in February following a 0.5% increase in January. Since February 2019, prices less foods, energy, and trade services moved up 1.4%. In February, producer prices for goods fell 0.9%, the largest decline since moving down 1.1% in September 2015. Over 60% of the February decrease in goods prices is tied to a 3.6% drop in energy prices.
Housing: After falling 1.3% in January, existing home sales jumped 6.5% in February. Year over year, existing home sales are up 7.2% (9.6% for the 12 months ended in January). The median sales price for existing homes was $270,100 in February, compared to $266,300 in January. Existing home prices were up 8.0% from February 2019. Total housing inventory at the end of February was 1.47 million, an increase from the January rate of 1.42 million units for sale. Following a strong January, sales of new single-family homes decreased in February, falling 4.4% below January’s totals. Sales are 14.3% above the February 2019 estimate. The median sales price of new houses sold in February was $345,900 ($348,200 in January). The average sales price was $403,800 in February ($402,300 in January). Available inventory, at a 5.0-month supply, was slightly lower than January’s 5.1-month supply.
Manufacturing: For the first time in three months, industrial production increased, climbing 0.6% in February after falling 0.5% the previous month. Manufacturing output edged up 0.1% last month but is still 0.4% below its level of a year earlier. Total industrial production was unchanged from a year earlier. New orders for durable goods climbed 1.2% in February following a 0.1% increase in January. New orders have advanced four out of the last five months. For the year, new orders for durable goods are up 0.4%. New orders for transportation equipment drove the increase, vaulting 4.6% in February. However, excluding transportation, new orders fell 0.6%. New orders for capital goods (manufactured assets used by businesses to produce consumer goods) jumped ahead 4.1% in February, driven primarily by a jump in new orders for defense capital goods, which soared 25.7%. Orders for nondefense capital goods inched up 0.5%.
Imports and exports: Import prices fell 0.5% in February after inching up 0.1% in January. February’s drop in import prices was the largest decrease since a similar decrease last August. Since February 2019, import prices have fallen 1.2%. Fuel imports plunged 7.7% in February, the largest monthly decline since prices receded 7.8% in June 2019. Excluding fuel, import prices actually increased 0.3% in February. Prices for exports dropped 1.1% last month after advancing 0.6% in January. This is the largest monthly decrease in export prices since December 2015. Prices for exports decreased 1.3% on a 12-month basis from February 2019.
– The international trade in goods deficit was $59.9 billion in February, down from $65.5 billion in January. Exports of goods for February increased 0.5% to $136.5 billion. Imports of goods dropped 2.6% to $196.4 billion.
– The latest information on international trade in goods and services, out March 6, is for January and shows that the goods and services trade deficit shrank to $45.3 billion, $3.3 billion less than the December trade gap. January exports were $208.6 billion, $0.9 billion less than December exports. January imports were $253.9 billion, $4.2 billion lower than December imports.
International markets: The spread of COVID-19 sent world markets and economies tumbling. With over 110 countries and territories reporting cases of the virus, major institutions and banks have cut their forecasts for the global economy. Several nations, led by China, have ordered certain areas locked down, restricting movements of millions of people and suspending business operations. China’s gross domestic product is expected to plunge to 4.9% this year, slower than earlier forecasts of 5.7% annual growth. Year to date, the STOXX Europe 600 Index fell almost 23%, Germany’s DAX slipped over 24%, France’s CAC 40 lost 24%, Italy’s FTSE MIB Index dropped 26%, the UK’s FSTE 100 Index has given back close to 23%, and Japan’s NIKKEI 225 is down 21%.
Consumer confidence: Not surprisingly, the Conference Board Consumer Confidence Index® declined sharply in March. The index fell to 120.0 from February’s 132.6. The Present Situation Index — based on consumers’ assessment of current business and labor market conditions — decreased from 169.3 to 167.7. However, the Expectations Index, which is based on consumers’ short-term outlook for income, business, and labor market conditions, fell from 108.1 to 88.2.
Eye on the Month Ahead
Individuals’ health is of primary importance as the world continues to battle the effects of COVID-19. Of secondary, but great importance, is the impact of this pandemic on the world’s economies and markets. April will, hopefully, begin to point toward recovery of both personal and economic health. The impact of the CARES Act should begin to be felt by individuals and businesses next month.
Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK);www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. The U.S. Dollar Index is a geometrically weighted index of the value of the U.S. dollar relative to six foreign currencies. Market indices listed are unmanaged and are not available for direct investment.
As we closed out 2020, the overwhelming sentiment entering January was that it couldn’t get much worse. Unfortunately, January did not start out on a high note. During the first week of the month, protesters stormed the United States Capitol, leading to violence, the disruption of the presidential election certification, and several deaths. Nevertheless, the inauguration of Joe Biden as our 46th president took place as scheduled. January also saw the emergence of virus mutations, the uneven distribution of COVID 19 vaccines, and the gradual relaxation of pandemic-related restrictions. Also during January, a new phenomenon in stock price manipulation emerged involving several companies, including a video-game company. Ultimately, stocks closed the month mixed, with the Russell 2000 and the Nasdaq gaining, while the Dow and the S&P 500 fell. Treasury yields, the dollar, and crude oil prices advanced.
The world’s economies and stock markets have been rocked by the spread of COVID-19. Investors’ fears prompted a major sell-off in February and March, plunging stocks well below their 2019 closing marks. Nevertheless, 2020 started off in a positive way. Following a strong 2019, stocks were slow to move forward as investors cashed in some of their 2019 gains. But by mid-January, each of the benchmark indexes were safely ahead of their 2019 closing marks. However, concerns over the COVID-19 outbreak in China quelled investor optimism. By the end of January, only the small caps of the Nasdaq remained ahead of their prior year’s pace, as each of the remaining indexes listed here fell into the red.