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Updates from the EWM Team:
Financial updates, tips, and news you can use.

EWM Updates

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Market News

We have taken time to discuss the US Treasury yield curve in the past, but we wanted to take a moment to point out some of the issues currently infecting the broader fixed income market. Due to the pandemic and the intense market constriction earlier this year, the Federal Reserve needed to take action to make sure that there was liquidity in the market. They did an admirable job with that, injecting enough cash into the system to keep the gears of finance moving when everybody else was too scared to take a risk. What they have also done is to destroy (in the short term) the risk/reward interplay in the fixed income markets.

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Market News

The pandemic unleashed some unforeseen consequences, both negative and positive on the average household in the US. While there is still much to be done to fully recover, we have seen some things that could point to good outcomes when full mobility has been restored.

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Market News

It is time to check back in on our old friend the yield curve. We know that the Federal Reserve is looking to keep the short end of the curve very low, but we are seeing an upward movement on the middle part of the curve (see the change from the 3/30/2020 line to the 11/13/2020 line in the chart above). This is normal. There is only so low that the 10-year Treasury can go, and there is only so much supply that the market is willing to soak up. This means that when there is more and more issuance, yields have to go up to entice investors to take on the risk of holding a longer-dated bond. The Federal Reserve has been doing its best to monetize the debt created by the large deficits over the past six months, and we don’t doubt it will continue to do such going forward.

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Last week, favorable feelings about factories factored into the broadly positive outlook on future domestic economic growth. On Monday, November 2nd, the Institute of Supply Management (ISM) released the October reading of its Manufacturing Purchasing Managers' Index (PMI), a widely followed survey of manufacturing businesses across the country. The index rose to 59.3 last month, its highest level in over two years. For this index, a reading above 50.0 indicates that the managers of manufacturing companies see economic growth in the sector, with a higher reading indicating greater growth prospects. A score below 50.0 signifies that the industry expects economic contraction. The number for October smashed analysts' expectations, and it indicates that sentiment in the sector is strengthening to pre-COVID levels after the sharp downturn in the spring of 2020 (see the chart below).

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Market News

With the pullback over the last two weeks, the S&P 500 is now just +2.77% on the year while the Dow Jones Industrials index is -5.38%. We have highlighted the disparity in returns a few times this year when looking at winners and losers from the COVID crisis. Only 27% of the companies in the Dow have a positive year-to-date return as of 10/30.

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Many students of probability theory (well, this author at the very least) have stumbled when they are confronted with the birthday paradox: What is the smallest number of people that need to be in a room for there to be a greater than 50% chance that two people in the room share the same birthday?

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Market News

We saw a divergence in economic recovery data last week. Retail sales have been on quite a run and popped again in September, breaking the pre-COVID trendline to the upside (shown in the chart directly below). This is good news for the economy. Overall retail has rebounded even as some sub-sectors have fallen on rough times.

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Market News

While news about the upcoming election and rumors about future federal stimulus packages get much of the recent credit or blame for the stock market's ups and downs, a less provocative market mover officially begins this week: quarterly corporate earnings season. Ultimately, a company has to at least promise investors future earnings and revenue streams for its stock to find value in the public marketplace. And the third quarter (Q3 2020) earnings season officially begins when the four largest banks by assets - Citigroup, JPMorgan Chase, Bank of America, and Wells Fargo - release their financial reports this Tuesday and Wednesday. With the market's emphasis on year-over-year statistics and 2020's sharp economic slump brought about by the coronavirus and subsequent government lockdowns, the numbers are expected to be historically bad, but what matters is if the businesses beat forecasts.

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Market News

While news about the upcoming election and rumors about future federal stimulus packages get much of the recent credit or blame for the stock market's ups and downs, a less provocative market mover officially begins this week: quarterly corporate earnings season. Ultimately, a company has to at least promise investors future earnings and revenue streams for its stock to find value in the public marketplace. And the third quarter (Q3 2020) earnings season officially begins when the four largest banks by assets - Citigroup, JPMorgan Chase, Bank of America, and Wells Fargo - release their financial reports this Tuesday and Wednesday. With the market's emphasis on year-over-year statistics and 2020's sharp economic slump brought about by the coronavirus and subsequent government lockdowns, the numbers are expected to be historically bad, but what matters is if the businesses beat forecasts.

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Market News

We saw incremental improvement in the unemployment rate in September with the headline number, called the U-3 rate, down to 7.9% according to the latest Jobs Report released last Friday. The report was not straightforward, as these things never are, but there are good items along with some bad. The good news is that Un- and Underemployment rates are below their Global Financial Crisis highs, and heading in the correct direction. Large unemployment spikes take time to work themselves out, and the quick rebound is a step in the right direction.

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Investors, both real and fictional, have tried to discern seasonal swings in stock prices for quite some time. Any anomaly in the chronology of return data can be given a name and pushed as the trend that will help eke out better performance for a portfolio. The traditional strong showing for stocks at the start of each year is labeled the "January Effect". An unusual clustering of very bad trading days in past Octobers (the month has seen two "Black Mondays", one in 1929 and one in 1987) is labeled the "October Effect". However, as the chart directly below shows, if we look over the last one hundred years or so of domestic stock returns, one month sticks out like a sore thumb - September, with an average -1.0% total return. Coincidentally, after four losing weeks, the S &P 500 is down -5.66% this month as of the market close on September 25th. Most market analysts would attribute the decline following four strong positive months to concerns that there won't be a second fiscal stimulus package this year from Congress, or anxiety about overvalued shares, or even jitters over the upcoming election. Nevertheless, is it possible the downturn was helped along by a mysterious "September Effect"?

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Market News

Proper public sentiment can galvanize economies just as powerfully as it can push new government policy. How the average U.S. consumer feels about his personal financial situation and the surrounding business environment greatly influences momentum in the markets. And with so much current COVID-induced uncertainty about where things are headed, indicators of public sentiment can become even more important in figuring out trends. Thus, the release last week of the preliminary September reading of the University of Michigan Consumer Sentiment Index, possibly the most scrutinized monthly gauge of the public's feelings about finances, was highly anticipated. The index takes a survey of U.S. consumer confidence on personal finances, the short-term overall economy, and the long-term overall economy and then converts those answers into a number where a higher score indicates greater optimism. The September reading beat market expectations with a value of 78.9, the highest level since March of this year. Of course, as the chart below shows, this is far below the readings taken before the coronavirus lockdowns. However, the chart also shows that we shouldn't be too sentimental about past sentiments, as public feelings about finances and the economy were much more pessimistic during the Great Recession of 2008-2009 according to the index.

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Market News

It is always interesting to see economic theories play out in real time. We know that airlines are struggling due to COVID-related travel restrictions and the fast shift in business culture away from traveling and towards video conferencing. Even before COVID, airline fares in the US had been on a near steady drop since 2014 (see the chart directly below). The much smaller number of business travelers is particularly painful because the often rushed, last-minute nature of much business travel has historically produced a nice profit margin for the airlines.

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Market News

"Hannibal is at the gates!" shouted the panicked people of Rome in 216 BC as the Carthaginian general appeared on the precipice of destroying their Republic. An implacable and ingenious enemy, Hannibal had repeatedly defeated the best armies Rome could muster. Running out of options, Rome reluctantly turned to a bold, unorthodox young man for help - a man known to history as Scipio Africanus. With a fondness for long hair and Greek philosophy, Scipio flouted the conventions of Roman society. He was a hippie and an iconoclast before hippies and iconoclasts ever existed. He assumed political offices for which he was not eligible. He had little patience for petty procedures and stuffy statutes in his drive to accomplish great things - and he would accomplish great things. Through a combination of charisma and cunning, he beat the Carthaginians back to North Africa and eventually defeated the once invincible Hannibal at the Battle of Zama in 202 BC. After the victories, Scipio was idolized by the public and placed above the law. Later on, when the Roman Senate would bring charges of embezzlement against him, Scipio would dismiss the accusations as not worthy of his time.

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With many questions turning from COVID to politics, it is important to refresh ourselves about what is important about electoral politics. There is no doubt that people are worried about the election. The electorate is always worried about upcoming elections and the future of this great nation. We get that, and we are also concerned about the future. But we are never convinced that the occupant of the White House has quite the impact that they are credited with in the press. Looking at the chart below tells us the same. Democrat and Republican regimes have had identical stock market returns through 2015.

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Market News

To err is human, but to prepare for error is ... well, maybe not divine, but it is a pretty important thing to do nonetheless. In that vein, we wish a belated "Happy Birthday" to software engineer Margaret Hamilton who turned 84 last week.

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Market News

The pandemic and the subsequent societal response have created difficult situations. It has also allowed us to observe some economic circumstances that we would have never been able to see were it not for these events. We are getting used to seeing incongruous headlines next to each other. Note below the big headline at noon Eastern Time on 8-17-2020 from the front page of Bloomberg.com, and then notice the second small headline below it underlined in yellow. How can these two items exist on the same news feed? 16% of Federal Housing Administration (FHA) loans are in delinquency, yet homebuilders are the most hopeful they've been this millennium.

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