Pandemic, Presidential Elections, earnings season, and China’s doing things, we didn’t start the Virus, yes we’re trying to fight it! It’s the 2nd week of Q3 earnings and analysts are looking for further insight into the speed of the recovery and how sustainable it may be. Last week, financial institutions reported earnings with most banks posting strong results hinting at an economic recovery underway (see Weekly Update 10/14/2020). A number of reports were released over the last week and with more coming this week that are shedding light on the retail industry, industrial production, unemployment, China’s economy, and the real estate market.

This week:

1. US retail, industrial and housing performance, is the economic machine churning?

2. The status of China’s economy, a blueprint for the recovery?

3. The President has a change of heart, a big stimulus pending?

What do we know so far?

• Retail sales (think food and beverage, apparel, electronics, furniture, vehicles) were up 1.9% vs an expected growth of 0.8%. You go, shoppers! And you too Glenn Coco!

• Industrial production (think utilities, manufacturing, mining) was expected to grow 0.5% but fell 0.6% instead, marking the first drop after four months of consecutive growth. 

• China posted mixed results. Consumer spending and industrial output grew, however, overall economic results were lackluster growing 4.9% vs an expected 5.2%.

• Every Thursday the Department of Labor publishes an update on jobless claims. This past week, 898.000 Americans filed initial jobless claims, ticking higher than expected by economists. 

• On Monday, the National Association of Home Builders (NAHB) posted their housing market index (HMI), which measures the sentiment of builder opinion relative to the level of current and future single-family sales. Homebuilder confidence climbed to another record high in October, beating expectations of it remaining flat compared to last month. Despite record sentiment, US housing starts left something to be desired (up 1.9% vs an expected 3.5% increase), while building permits popped 5.2% vs an expected 3.0%, signaling a positive direction in a sustained positive trend for the real estate market.  

• Finally, the Donald seemed to have a sudden change of heart. Whatever his reasons, Trump is now pushing for a larger stimulus than Democrats originally requested - a reversal from his prior position against a large stimulus package. Mr. Market seemed to like this news as pre-market figures rose early Monday morning on the news. However, prices fell in afternoon trading - it looks like Mr. Market will need greater assurance from Congress to rally on the news of a stimulus. Speaker Pelosi has set a Tuesday deadline for the government to reach an agreement. 

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Blah Blah Blah, So What? 

• US Retail growth suggests that Americans are slowly returning to their habits focused on consumer spending. Our economy works best when money circulates throughout the system, and spending keeps the big wheel spinning. Growth in retail spending is a good sign the economic machine is slowly starting to turn again. 

• The US is less reliant on its industrial/manufacturing sector than other countries like China where the industrial sector makes up 40% of the country’s GDP. In the US, the industrial manufacturing sector makes up roughly 14% of the GDP. That being said, the sector is still critical to the economy as it affects numerous industries and jobs across the country. If the industrial sector slows down it will have a domino effect on several adjacent industries (e.g., auto, transport, energy, construction, shipping, retail, even services like restaurants and hotels).

• China’s pandemic started months before the virus spread to the rest of the world. As a result, China started on the path of economic recovery earlier than other countries and is looked to as a blueprint for the rest of the world. If China is struggling, it is sure to make noise across financial markets as countries reassess their own economic forecasts for the recovery.

• Real estate figures help provide insight into the health of one of America’s most sensible sectors after the 2008 crisis. Homebuilder sentiment alongside building permits and housing starts provide depth into how companies and people are feeling about further developing the real estate market. Real estate investments are expensive and a long-term commitment. Strong commitment and growth in real estate provide a guideline for other industries, such as banking (mortgages), construction (cement), raw materials, and manufacturing to name a few. In summary, the real estate market is a big domino in the economic machine. We’ll learn a bit more on Thursday when the NAHB will release the existing home sales report too. 

• Despite jobless claims steadily declining since peaking at about 7M in March, the decline in claims has stagnated over the past few weeks around 800-900K people. More needs to be done to return to pre-pandemic levels (around 200.000 initial claims) and all eyes will be on the government stimulus package for assistance. Given the trend reversal, analysts will be paying close attention to the Department of Labor’s weekly jobless claims report this Thursday. 

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Earnings come out strong!

The results of 43 out of the first 50 companies in the S&P 500 to release earnings beat Wall Street’s expectations. Take that Wall Street! As an investor, it’s important to note that Wall Street is not always right and the story is looking a lot like analysts were overly skeptical about the short-term recoveries in certain economic sectors. Investment banks led the way with strong earnings last week; Goldman’s Sachs beat expectations by 74% while retail banks such as Wells Fargo struggled (see What Retail Banks Tell Us About the Economy). This week we’ll see more S&P 500 earnings from, Procter and Gamble, Verizon, Netflix, AT&T, Intel, and American Express among others. Tesla will also be reporting this week. 

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