Each month, representatives from Allianz Investment Management LLC provide commentary on market and economic indicators, including Federal Reserve actions, interest rates, credit markets and economic releases such as inflation, GDP, consumer confidence, housing, retail sales and job unemployment news.
Allianz Investment Management LLC November Market Update
Equities started the month of October with strength on hopes of additional stimulus but slowly sold off during the second half of the month as the likeliness of the Democratic and Republican parties agreeing on a stimulus package diminished. Additionally, increasing COVID-19 virus cases within the U.S. and around the world also put downward pressure on risk assets like equities. Ultimately, all three major U.S. indexes ended the month lower, as the gains from the beginning of the month were erased entirely.
Volatility, as measured by the VIX Index, edged higher throughout October. There were a number of factors that drove the uptick with some of the most notable being President Trump testing positive for COVID-19 at the beginning of October followed by election uncertainties and rising virus cases both domestically and abroad. Since the end of the month, we’ve seen volatility retreat substantially due to Pfizer announcing that its COVID-19 vaccine is 90% effective and the fear of a drawn out, contentious election being mostly avoided.
The Treasury yield curve bear steepened throughout the month of October with the longer end of the curve increasing the most while the short-end remained nearly unchanged. Interestingly, the rise in rates came at a time when volatility was moving higher and equities were selling off. Typically, during an event like the one described previously, you’d see investors flock to safe-haven assets like Treasurys, which ultimately would push yields lower. However, that wasn’t the case at the end of October. Furthermore, rates have since steepened further following the positive vaccine announcement from Pfizer. Going forward, we expect more modest upward pressure on rates.
Hurricane Zeta pushed oil prices higher during October, as nearly 50% of oil production off the U.S. Gulf was halted. However, the gains in oil dissipated toward the end of the month as a crude inventory buildup in the U.S. more than offset the supply constraints from Hurricane Zeta. Rising COVID-19 virus cases are the likely the reason for the drop in demand and corresponding buildup in inventories. Overall, we expect oil to be range bound as demand ebbs and flows as a result of the virus.
Consumer confidence, as measured by the Conference Board, unexpectedly declined in October to 100.9 from September’s downwardly revised figure of 101.3. Within the data, consumer’s sentiment toward current conditions increased to 104.6. However, consumers felt less optimistic toward short-term expectations for employment and business conditions. Overall, the COVID-19 virus continues to weigh on consumers, as sentiment levels still remain far below the pre-pandemic highs.
Real gross domestic product (GDP) increased at an annual rate of 33.1% in the third quarter after a drop of 31.4% in the second quarter of 2020. The recovery was driven by a 40.7% rebound in consumption, which itself was based to a large degree on an increase in durable goods consumption and to lesser degree on nondurable and services spending. Other contributors to the rebound were business equipment and residential investment, while government expenditures and net exports were detractors.