COVID-induced demand from homebuyers over the summer caused an exceptionally strong spike in home prices in September.
Home values jumped 7% annually in September, up from a 5.8% annual gain in August, according to the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index. That is the largest annual gain since September 2014. Prices are now nearly 23% higher than their last peak in 2006.
Over the past 10-years, small-cap stocks have had a tough run versus the large-cap stocks. The graph below shows the ratio of the Vanguard Small-Cap ETF (VB) divided by the Vanguard Large-Cap ETF (VV) over 10-years, or 2,515 trading days. Small-cap have underperformed for three consecutive calendar years and five of the past six calendar years.
After a tough start to 2020, small-caps have taken-off, as the initial COVID-19-related shock has begun to abate and signs of economic recovery are a bit more visible. Since the March 18 trough, small-caps have rebounded with a 77.6% gain, eclipsing large-cap’s 52.3% gain by 25.3%.
For the past 3-months, small-cap stocks have outperformed large-cap stocks by more than 9%. The graph below shows the ratio of the Vanguard Small-Cap ETF (VB) divided by the Vanguard Large-Cap ETF (VV) over 66 trading days.
Looking ahead, we cannot predict precisely how this recovery will unfold, but we suspect that the rally in stock prices has further to run (our call in March was 3Q22). We expect volatility will abate somewhat, as the economy returns to a new-normal. This will very likely be an exciting time for active stock pickers in the small-cap space.
Treasury Secretary Mnuchin announced plans to let several market support programs expire on December 31, including the Main Street Lending program as well as facilities designed to protect the Corporate and Municipal bond markets. Mnuchin feels that these facilities have served their purpose. Fed Chair Powell disagreed, stating that the Fed “would prefer that the full suite of emergency facilities established during the coronavirus pandemic continue to serve their important role as a backstop for our still-strained and vulnerable economy.”
Government intervention in markets is very rarely cost-free and is often accompanied by unintended consequences. Markets are currently functioning without aid and the expiration of these programs is likely to have little market impact. The Treasury has the ability to reinstate the programs if needed.
October retail sales rose 0.3%. September sales were revised lower, from 1.9% to 1.6%.
October sales were slower than expected, but the recovery from the March / April lows has been remarkable. Retail sales in September and October were ahead of the pre-pandemic trend. As with everything these days, the resurgence of the virus and new regulations may exact a toll in the short-term, as the world waits for vaccines to become widely available.
Initial jobless claims rose last week from 711,000 to 742,000. Continuing claims fell from 6.8 million to 6.3 million.
Employment gains are slowing and there is a long way to go to recover all jobs lost due to the pandemic. The first order of business is to control the spread of the virus, which is proving difficult. Gains in employment statistics will likely slow further as COVID continues to surge.
COVID-19 Pfizer released preliminary results from their COVID-19 vaccine trial that indicated 90% effectiveness, much better than expected. Moderna indicated that they expect to release favorable effectiveness data soon as well. Equities rallied, credit spreads tightened, and longer interest rates rose on the news.
The markets reacted positively to news that effective COVID-19 vaccines will likely be widely available within the next 6-12 months. This would enable economies to more fully reopen. However, there is still going to be a period of months where COVID-19 infections are likely to continue rising. Measures to contain the spread of the virus during that time as well as the impact of such measures since last March could have longer-lasting negative economic effects.
Inflation October consumer prices were unchanged while producer prices rose 0.3%. Year-over-year, consumer prices are up 1.2% and producer prices have risen 0.5%. Inflation remains benign and is unlikely to cause the Fed to change rate policy anytime soon.