OPEC released its latest oil market report, which contained this observation about the next 12-18 months (emphasis added):
“Third, even in the case of a rapidly marketable vaccine, the impact of COVID-19 will be felt on a larger scale than previously envisaged in 2021, as the global economy continues to adapt to the ‘new normal.’ Such adaptation will be accompanied by important structural changes in the global economy, ranging from supply chain alterations to a rise in digitalisation, more home-office bound working and less business-related travel. Moreover, it is expected that debt levels across the world will continue rising. This includes the US, with the potential for a further softening impact on the value of the US-dollar. Moreover, it is expected that the labour market will continue to be impaired, with those economies that are flexible and dynamic will be better equipped to weather this trend. During this ongoing transition period, the global economy is also forecast to face a slowdown in productivity.”
To my knowledge, this is the first projection that convincingly argues the pandemic is causing a structural transformation of the economy.
Tomorrow, the Federal Reserve releases the latest industrial production data. Here is the current data:The absolute number (left) has regained about half of its losses from the lockdown. But the last report contained a deceleration in the rate of improvement. The Y/Y percentage change (right) is still negative.
Manufacturing has improved; this sector’s production level has recouped about 2/3 of the lockdown losses (left). But the Y/Y percentage change is still negative (right).Utilities saw an increase during the lockdowns (left) as the stay-at-home orders fueled a rise in energy consumption. The Y/Y percentage change (left) was positive as a result.
However, mining (oil extraction) is still very weak, its production levels are still depressed (left), and the Y/Y percentage change is still negative (right).
Virus caseloads are increasing (emphasis added):
Rapidly increasing caseloads across Europe are raising fears of another surge as winter approaches and people around the world chafe under pandemic restrictions that impede their daily lives – and their livelihoods.
The number of new coronavirus cases in the United States is surging once again after growth slowed in late summer. While the geography of the pandemic is now shifting to the Midwest and to more rural areas, cases are trending upward in most states, many of which are setting weekly records for new cases.
All Fed presidents have noted that economic growth is virus-dependent. These increases point to slower growth.
Today, I wanted to tie together a few concepts about where we are in the long-term trends fundamentally and technically. First, I’ve previously argued that the first phase of the recovery is over and that we’re entering a new phase in which growth will be more difficult. I think the following data is supporting this argument.
- The resurgence of the virus in the EU and US will slow growth in 4Q20.
- The first round of stimulus is fading when unemployment is still high, which will also depress demand.
- The pace of increases in the coincidental indicators is slowing.
Last week, I noted that the weekly charts for the major indexes were very stretched. Those aren’t the only indexes with that characteristic. XLK Weekly 10-year
The technology ETF (which is 28% of SPY and 49% of QQQ) is very stretched from a momentum perspective. XLC Weekly 10-years
XLC (which is 10.73% of SPY and 20% of QQQ) has the same issue on its weekly chart, as does… XLY Weekly 10-year
…XLY (12% SPY, 17% QQQ; same links as above).
A key reason I look at individual sectors is that they are the frame or scaffolding of the larger indexes. Some sectors – like tech, communication services, and consumer discretionary – comprise a larger percentage, making them more important.
Also, this doesn’t mean that the above sectors can’t run higher and become more stretched. For example, suppose Washington passes a major stimulus bill, the markets can most likely rally higher.
But overall, the data increases are slowing, which makes additional increases more difficult.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.