News & Insights

The following has been compiled from information and comments provided by the investment professionals of Frost Investment Advisors:  

Market Jitters…

Last week was difficult for the markets with most of the major indexes closing lower and the tech-centric NASDAQ posting a nearly 10 percent drop from its September 2 high.  Unfortunately, once again there were few hiding places for investors with most industry sectors down, especially anything momentum driven.  The good news is that, despite last week’s sell-off, the primary drivers of this nearly six-month recovery are still in positive territory.  Checking in with the five top stocks in the cap-weighted S&P 500—Apple, Microsoft, Amazon, Facebook and Alphabet, Inc.—all of these companies are still sitting at strong year-to-date returns, with the shopping/home delivery king Amazon still up nearly 69 percent.

Now, whether investors have weathered the market roller coaster remains to be seen, as the most recent ICI data points to equity mutual fund and ETF outflows of -$176 billion over the past 13 weeks (as of September 2), offset by inflows into bond mutual funds and ETFs of +$277 billion. This is in a fixed-income environment with only a few basis points of separation between two-year and 30-year Treasurys.
Despite the market anxiety, most of which we expect is pre-election jitters, the overall flavor of the economic headlines for the week was positive.  Two key headlines reflected improvement, both in the Small Business Optimism Index (NFIB) and home ownership.  Looking at the small business indicator, there was a small increase in August from a month earlier (to 100.2 from 98.8), but the good news in the survey was that hiring intentions ramped up to pre-pandemic levels.

As for the real estate markets, the improvement has been a rolling phenomenon for the past three to four months, and each successive month seems to add a little more traction.  This improvement is evident again in the September 4 mortgage purchase application numbers, posting an increase of 2.6 percent for the week and up 40 percent over last year.  As we’ve noted in past issues, a correlation exists between retail spending and home purchases which, according to data from Renaissance Macro Research, has boosted credit card spending at building material and furniture stores by 30.2 and 22.6 percent, respectively.  This increase in new home outlays ultimately leads to increases in durable goods purchases, including appliances and cars.

On a negative note, job growth fell short of expectations last week, as investors were looking for a meaningful drop in initial claims. Unfortunately, initial claims reported were relatively unchanged at 884,000 for the week, ending September 5.  The disappointment from continuing claims reporting at 13.385 million, higher than the expected 12.6 million, also helps explain last week’s fragile market.  What was lost in the market response was the follow-up report on new job openings (JOLTS) for the period ending July 31, with a rise of 6.618 million job openings.  The key consideration here is highlighted by a Bespoke Research comment noting that the number of open jobs as a percentage of the labor force is now getting back to pre-pandemic levels.  While the job markets are still in a state of disarray, encouraging signs of recovery are evident in the manufacturing, transportation and retail industries.

Another key element to a continued recovery is additional stimulus support for the labor markets that are still shut down by quarantine efforts. Through this past weekend, a stimulus remains an unresolved issue, held up by congressional bickering.  Investors and the markets are still expecting this to happen to bridge the economy through a vaccine or a similar solution.