U.S. equities fall despite more good news on the vaccine front

Brian Nick

The last week’s market highlights:

Each week, we present our featured topics in the context of the major themes listed below from Nuveen’s Fourth-Quarter 2020 Outlook:
  • U.S. economy: After the third-quarter bounce, a wobblier and flatter trajectory for U.S. growth.
  • Global economy: Considerable fiscal stimulus should keep economies afloat.  
  • Policy watch: No Federal Reserve interest-rate hikes until at least 2023.
  • Fixed income: Lean into higher-risk assets to generate income.
  • Equities: Focus on quality across the board (and dividend payers, too).
  • Asset allocation: Consider benefits of active management amid idiosyncratic opportunities.

Quote of the week:

“Many of the things you can count, don’t count. Many of the things you can’t count, really count.” – Albert Einstein

U.S. consumers finally pump the brakes on spending in October

Despite rapidly declining unemployment, low levels of debt and high savings rates, U.S. consumers curtailed their spending growth in October. Headline retail sales grew at a below-forecast 0.3% rate, while core retail sales — the measure used as an input for calculating GDP – inched up by only 0.1%.4 Even that meager gain depended on the fortuitous rescheduling of Amazon Prime Day from July to October.
October’s disappointing tallies aside, the growth in sales over the past 12 months remains impressive, especially in light of the pandemic-fueled recession in the first and second quarters. Still, it wouldn’t surprise us if last month’s deceleration was the start of a trend. First, fear of contracting the virus and/or the possibility of renewed lockdowns amid the surge in new cases could keep people at home, limiting their ability to spend on certain things even if they wanted to. Second, while household balance sheets are still generally healthy, consumers are beginning to feel less confident about the economic outlook, as reflected in November’s University of Michigan consumer sentiment index (released last week). This could reduce their willingness to dip into savings or take on more credit card debt to increase spending.
While consumers have displayed some signs of nervousness, the housing market appears to be in fine shape, evidenced by last week’s bullish data releases:5
  • The NAHB homebuilder confidence index surged to an all-time high in November.
  • Housing starts rose 5% in October, to their best levels since February.
  • Building permits, a leading indicator, matched September’s 13½-year high.
  • Existing home sales increased for the fifth consecutive month in October.
What’s supporting the U.S. housing market? A series of tailwinds, including historically low interest rates, younger first-time buyers and strong demand for suburban homes as the virus drives more buyers away from densely populated cities. And keep in mind that a healthy housing market tends to lift consumer spending (which makes up roughly 70% of GDP) as folks furnish their new dwellings.
Despite this potential boost to growth, we believe consensus forecasts calling for 4% annualized GDP growth in the fourth quarter are too bullish. What’s behind our more downbeat outlook? For starters, while consumer spending growth may reaccelerate once vaccine(s) have been widely distributed and administered, the U.S. economy remains in some immediate peril while the virus continues to spread. We’ve already begun to see some signs of stalled progress in the labor market.
A double-dip recession (i.e., another contraction on top of the one experienced in the first and second quarters of 2020) would require GDP to shrink in both the fourth quarter of 2020 and the first quarter of 2021. This is unlikely to occur, in our view, assuming there’s at least some vaccination success early next year and Congress provides at least some economic relief early in 2021. Even so, we can’t dismiss the possibility of negative GDP growth in the fourth quarter and a rise in unemployment.

With future U.S. trade policy largely unknown, Asia-Pacific pact looms large

Last week, 15 countries in the Asia-Pacific region signed the Regional Comprehensive Economic Partnership (RCEP) agreement, which binds together close to 30% of the global economy and will become the world’s largest free trade pact once it’s ratified by its signatory countries. This process could take until January 2022 or longer.
RCEP includes two of the world’s three largest economies (China and Japan), but by definition excludes the largest, the United States. Another existing trade agreement, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) has membership that overlaps considerably with RCEP’s, with China’s absence from the latter the biggest differentiator. The CPTPP also includes countries from North and South America, but not the U.S. (The CPTPP grew out of the Trans-Pacific Partnership (TPP), a trade pact that the U.S. had signed in 2016 but which never took effect, as President Trump withdrew from it in 2017.)
The Brookings Institute forecasts an additional $500 billion in global trade by 2030 thanks to the RCEP. Together with the CPTPP, the economic relationships forged between member countries should more than offset the dollar value of trade lost during the U.S./China trade war that Trump initiated in 2018. Unfortunately, the U.S. stands to miss out on these gains.
Although President-elect Biden is set to occupy the White House in less than two months, it’s still too soon to say how his administration will approach trade policy. Biden could choose to remove some of the Trump tariffs, particularly the broadest ones on products regardless of their origin (such as steel and aluminum) or the levies that Trump imposed on allies like Canada, France and Italy.
During November, the possibility of a less confrontational tone on trade has reduced demand for safe-haven assets like the U.S. dollar. This has contributed to a sharp decline in the dollar versus practically every currency. Also weighing on the greenback is the diminished role the U.S. is currently playing on the global trade stage. That could hurt U.S. GDP growth and blunt future increases in U.S. Treasury yields, making the U.S. a less attractive destination for foreign capital. Emerging-market (EM) currencies, led by the Turkish lira and Brazilian real, have fared especially well against the dollar.6
Looking ahead, a more stable global backdrop for trade — aided by agreements such as the RCEP and CPTPP and what is likely to be a less combatively protectionist Biden administration — should support risk assets generally and EM currencies specifically. Trade policy uncertainty rarely serves as a major market mover, but it can prove to be highly disruptive, as we saw when the U.S. and China’s tit-for-tat trade barbs were at their peak.
  1. Marketwatch, Bloomberg
  2. Haver
  3. Bloomberg
  4. Bloomberg, Haver
  5. Haver, NAHB, National Association of Realtors
  6. Nuveen
This material is prepared by and represents the views of Brian Nick, and does not necessarily represent the views of Nuveen LLC, its affiliates or other Nuveen staff.
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