Macro Perspective

Ultra-accommodative monetary policy and increasingly negative real interest rates boosted the NAHB/Wells Fargo Housing Market Index (HMI) to yet another all-time high in October. All geographies exceeded their three-month average, and single-family sales continued to exceed starts. While some sectors (such as travel and leisure) continued to struggle, housing remains a clear bright spot for the economy.

Despite widespread economic disruption, the US Census Bureau announced third-quarter applications for new businesses increased 77.4% over the second quarter. Notably, 34.3% of those applications are classified as having a high propensity of turning into meaningful wage-generating businesses. While a plethora of opportunities may arise as society adjusts to a “new normal,” finding lenders that share in that optimism may be challenging in the current environment.  

Equity Markets

Smaller capitalization companies resumed their outperformance over large cap last week, as investors remain hopeful a fiscal stimulus deal can be brokered in the next two weeks. Since President Donald Trump initially stated on October 6 that fiscal stimulus talks were off until after the election, the S&P 1500® is up more than 3%, led by smaller cap and value style stocks.

The CBOE Volatility Index (VIX) futures curve fell into full backwardation on October 22. It is rare to see all monthly futures contracts priced lower than the preceding month rather than an upward sloping curve. The VIX futures curve has not been in full backwardation since mid-April, a stark reminder that markets are not out of the woods yet with regard to volatility.

The MSCI World ex USA Index outperformed domestic equities for the first time in five weeks, with gains in Financials after solid European earnings last week, and Japanese autos on an improving outlook for US auto sales. The MSCI Emerging Markets (EM) Index delivered significant outperformance versus domestic equities, led by broad strength across EM banks, followed by gains in technology-related names.

Fixed Income Markets

Fixed income markets struggled to extend positive returns last week amid increased volatility in interest rates, as the Bank of America MOVE index reached its highest level since June. The increase in Treasury yields was the primary driver of returns, with higher duration indices far underperforming lower duration peers and spread sectors broadly outperforming.

Based on increased optimism for a fiscal stimulus deal, the 2- to 30-year and 2- to 10-year yield curves reached their steepest levels of 2020. We expect further steepening over the intermediate term as the economy normalizes and recovers.

Table of the Week

Earnings season is in full swing, with about a quarter of S&P 500® constituents having now reported. The blended earnings growth rate (actual growth rate combined with consensus estimates) is -16.5%, much better than the growth rate expected at quarter end.

The blended earnings growth rate improved nearly 2% versus the prior week, as growth estimates improved across most sectors, with the exception of deterioration in the Energy sector.

Fourth-quarter earnings revisions have improved 2% since last week, and the consensus estimate for earnings growth is now -17.8% for calendar year 2020 versus -18.0% last week. This week, over 180 companies are expected to report.

View Chart of the Week on the full report