for Week Ending September 25th, 2020
WEEKLY MARKET SUMMARY
Global Equities: An uptick of coronavirus cases in Europe helped lead to equity market weakness globally, as partisanship pertaining to a new supreme court appointment battle added fuel to the domestic market uncertainty fire around another pandemic relief bill and the upcoming presidential election. Leadership from the large-cap technology sector during the week propped up the Nasdaq Composite Index for an advance of 1.1%, while weakness in the lagging energy and financial sectors weighed on the Dow Jones Industrial Average and the S&P 500, who dropped by -1.7% and -0.6%, respectively. International equities were relative underperformers, as the US dollar advance dented international confidence, leading to a -3.2% weekly decline for the developed market iShares MSCI EAFE ETF (EFA) and -3.6% for the emerging market iShares MSCI EM ETF (EEM).
Fixed Income: Interest rates declined slightly during the week, though remained within their recent range despite continued softness in risk assets. The yield on the 10-Year US Treasury Note slipped from 0.69% at the start of the week, to around 0.66%. Both, investment grade (IG) and high yield (HY) corporate bonds fell during the week as spreads widened from recent lows. The iShares Long-Term Corporate Bond ETF (VCLT) fell by -1.4% during the week, while the iShares iBoxx US High Yield Bond ETF (HYG) dropped by -1.6%. The similar performance was not evidenced by the Refinitiv Lipper fund flows, which showed $4.16 billion flowing into IG funds, while $4.22 billion left HY bond funds during the week ended 9/23.
Commodities: The strengthening US dollar took the wind out of the sails of oil prices during the week, while global demand fears intensify with the return of cold weather and a potential second-wave of COVID19 in the northern hemisphere. Domestic oil production may be bottoming as the intense decline in North American rig counts slowly begin to tick higher, according to the Energy Information Agency (EIA). The US West Texas Intermediate crude oil benchmark fell by -2% during the week, to finish slightly above $40 per barrel. International Brent Crude slipped by -2.9% and finished just under $42 per barrel. The price of gold fell to $1,866 per ounce during the week.
WEEKLY ECONOMIC SUMMARY
Hot Housing Market: US existing home sales rose to the highest level in 14 years, in August, according to the National Association of Realtors. Record low mortgage rates and pent-up demand during the lockdown exacerbated by widespread urban exodus to the suburbs powered an annualized 6 million sales during the month, which was 2.5% higher than the previous month and 10.5% higher than the same period in 2019. Median existing home prices reflected the demand as well as a reported supply crunch, rising by 11.4% since last year to a record median of $310,600. The sustainability of the red hot market may be in question as rising prices begin to offset the benefits of low interest rates, though the limited supply and rising costs of raw building materials may provide a stable floor if the labor market can stabilize.
Jobless Claims Rise: Initial jobless claims were again higher than expected during the week as another 870,000 people applied for unemployment benefits for the first time. The figure actually came in higher than the prior week, though the smoother 4-week moving average continues to trend downward, falling to 878,000 from the prior 913,000. The one-week delayed figure on continuing claims, of those receiving benefits for at least 2-weeks, fell by 167,000 to 12.58 million. The expiration of expanded federal unemployment benefits has reportedly incentivized many to return to work, though the level of those needing to access the safety net for the first time continues at a historic pace.
Durable Goods Orders Miss: Orders for Durable Goods (goods that last 3+ years) increased by less than expected during the month of August, rising only 0.4%, after the large 11.7% increase in July. Estimates were in the 1.5% area for the leading indicator of future economic activity that echoes other indicators showing a deceleration in the pace of the recover from the 2nd quarter trough. Machinery, metals, and electronics helped the Core Capital Goods measure, which excludes aircraft, rise by a greater than expected 2.5% during the month as the prior month was also revised higher. More businesses are reluctant to continue the pace of business investment due to uncertainty about the US consumer without continued fiscal stimulus that helped boost spending during the heart of the pandemic shutdown.
CHART OF THE WEEK
The Chart of the Week is a year-to-date chart of the Financials Select Sector SPDR ETF (XLF), which represents large-cap US financial sector equities. XLF has broken support of its 50-day moving average, while continuing to be the year’s second worst performing major sector, due to a seemingly indefinite low interest rate environment and fresh reports of suspicious financial transactions for the some of the world’s largest banks. We currently have no tactical exposure to XLF, though remain appropriately invested in large-cap financials within buy-and-hold strategic portions of Hanlon All-Weather Models.
Chart data provided by stockcharts.com. Commentary and opinions are those of Hanlon Investment Management.
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