Stocks continue to focus on a post-pandemic environment despite the high infection rate and new shutdowns that present near-term headwinds to economic activity.

We now have very positive results for three different vaccine candidates that are causing significant optimism that the pandemic will ultimately fade. While we are seeing some slowing in economic activity, this is after a very strong third quarter as the economy reopened.

We remain positive on our outlook as we head toward 2021 and continue to see many encouraging indicators despite the recent increase in COVID-19 infections. While the S&P 500 slipped 0.8% last week, this is after posting a new all-time high in the previous week. Additionally, the outperformance of the cyclical sectors is encouraging. Energy, Industrials, Materials, and Financials all posted positive returns last week. These sectors are forecast to see significant earnings growth in the coming year after profitability suffered greatly due to the pandemic lockdowns.

In another positive sign, corporate bond credit spreads continue to move lower—signaling a lower probability of future defaults as economic conditions improve. S&P earnings-per-share are up 94% from their recession low and are now off just 5% year/year. This is much better than early estimates which forecast profitability to be off by 21%.

Economic Readings Showing Moderation

The Conference Board’s Leading Economic Index (LEI) rose 0.7% in October, matching the consensus. It was the sixth consecutive increase, but the smallest in that sequence, as the outlook for near-term growth has moderated after the initial post-lockdown surge. Seven of the 10 LEI components made positive contributions, led by ISM new orders and initial jobless claims.

After several months of strong growth in the aftermath of the spring lockdown, retail sales rose a below consensus 0.3% in October, the least in six months. The slower start of the fourth quarter coincides with the spike in COVID-19 cases nationwide. Industrial production rose a better-than-expected 1.1% in October. Similar to other indicators, production rebounded strongly in the first few months of reopening, but has since moderated.

The housing market remains a major bright spot. The NAHB Housing Market Index (a builder confidence survey) jumped five points in November, its seventh consecutive gain, to 90, a new record high. All three index components rose, advancing further into record positive territory. In all four geographic regions, builder confidence was at or near a record high. This increase in confidence is showing up in higher home sales. October housing starts increased 4.9% to a 1.526 million unit annual rate, up in five of the past six months, and above the consensus of 2.5%.

Existing home sales increased 4.3% in October to a 6.85 million unit annual rate, the highest level since February 2006. Sales were up 26.6% from a year ago, the fastest pace since November 2009. All four regions posted monthly and y/y gains. We remain bullish on housing which is supported by record-low mortgage rates, a pandemic-related move from dense urban to suburban areas, and favorable demographics.

International Readings Remain Encouraging

While Europe is being negatively impacted by another wave of high infections and new lockdowns, the data coming out of Asia remains positive. China and Japan are the 2nd and 3rd largest economies in the world and are playing a major role in keeping the global expansion on track. China’s economic activity has already recovered to pre-pandemic levels while Japan is benefitting from the global rebound, and its own enormous monetary & fiscal stimulus. Japan’s Nikkei stock index is at a 29-year high, and is the second best major market in the world, off the COVID-19 lows.

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