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 October Market Update
Broad stock indices took a hit last month as investors weighed the upcoming election risks against lofty valuations. The S&P 500 Index still remains in positive territory for the year, but it appears that some chips were taken off the table over the past month. For instance, the strongest performing sectors since the pandemic, like technology, took the brunt of the selloff. We are less than 60 days until the election and the current backdrop is setting up for a volatile market event. A contentious U.S. election is sure to bring on a wave of volatility as investors grapple with uncertain outcomes in an already jittery market environment.
After spiking to a high of 38.28 in early September, the Cboe Volatility Index (VIX) settled down in the mid-twenties by month's end. Much of the increased volatility last month was a result of lofty valuations in technology stocks that caused investors to de-risk. Looking ahead, the market is expecting elevated volatility beyond the election as VIX futures for November, which represent 30-day forward expected volatility, are priced higher than the following month contracts. Time will tell if expected volatility turns into realized market volatility, but for now the market is bracing for the period leading up to and beyond the election to experience some market turbulence.
Despite being near the top end of their recent trading range, Treasury yields continue to be anchored by Fed purchases and investors posturing for economic uncertainty in the coming months. The correction in equities throughout September spurred a risk-off tone in the market that kept Treasury yields fairly steady throughout the month. Additionally, the upcoming election will likely steer nervous investors towards safe-haven assets like U.S. Treasuries. Beyond the immediate uncertainties on the horizon, we see a plausible path for rising interest rates as the macro backdrop continues to improve and the hunt for an effective COVID-19 vaccine continues.
With the macro backdrop slowly improving and the supply dynamics in oil markets stabilizing further, the momentum for West Texas Intermediate (WTI) crude oil prices remains upward. However, we still remain cautious at current levels as demand is still well below pre-pandemic levels. Significant drivers of demand, particularly the airline industry, are still struggling with the aftermath of the virus and until we have effective vaccines, it would be difficult to see a significant jump in energy prices from current levels.
The ISM manufacturing index came in at 55.4, slightly below expectations of 56.5 and August’s reading of 56.0. The decline was driven by a drop in the new orders index, which settled at a more sustainable level at 60.2 from August’s reading of 67.6. With manufacturing output still 6% below its February level, there is plenty of room for rapid growth over the coming months, as production catches up with the much faster rebound in goods consumption. It is worth noting that the shortfall in inventories, which are at their lowest level since June 2010, is putting upward pressure on prices.
The expiry of the enhanced unemployment benefits at the start of August did not have as catastrophic of an impact on spending predicted by some analysts. While August retail sales figures underperformed expectations, they still rose 0.6% in August vs. the 1.0% expected. Consumer spending was positive in 7 out of 13 categories, and food services sales saw the strongest rise at 4.7% due to declining virus numbers allowing more bars and restaurants to reopen. Retail sales now stand $10.3 billion (1.9%) above its pre-pandemic level in February 2020. However, in the absence of further fiscal support, we expect consumption to inevitably slow.