Calvert News & Commentary

November Market Commentary: Economic Recovery Slow to Start


Untitled Document

By Natalie Trunow, Chief Investment Officer, Equities
Calvert Asset Management Company, Inc.

Natalie Trunow, Head of Equities Natalie Trunow,
CIO, Equities

During November, equity markets focused on the positive side of the continued flow of mixed U.S. economic news. While concerns remained regarding several important economic indicators, others showed improvement. Toward month end, the equity market rally on stronger reports about consumer spending and sentiment was followed by a short-lived sell off across global markets triggered by reported debt problems of Dubai World. For the month of November, the U.S. equity market gained 5.9%, as measured by the Russell 1000 Index. Small cap and international stocks rose 3.1% (Russell 2000) and 1.8% (MSCI EAFE IMI), respectively.

Signs of Encouragement

During the month, the U.S. economy showed some overall improvement, with the Conference Board’s Leading Economic Index for the U.S. rising 0.3%. Manufacturing numbers in particular were positive thanks to inventory rebuilding, which indicated once again that businesses–rather than consumers–are driving this economic recovery so far. Inflation remained at bay during the month, with wholesale prices increasing only slightly.

Uncertainties Still Exist

Despite a strong month for equity markets, several economic reports gave cause for concern. At the end of the month, the unemployment rate came in at 10.2%, which continues to challenge the U.S. consumer.

As for real estate, defaults of commercial mortgage-backed securities (CMBS) continued to rise as the commercial real estate market continued to deteriorate, further impairing the financial health of lenders. In the financial sector, bank failures in 2009 reached 115 by the end of November, pushing the FDIC into deficit. The Fitch bond rating agency stated that life insurance companies could lose up to $22.6 billion on their commercial real estate holdings over the next two years, with losses intensifying in the next six to twelve months.

Residential real estate fared no better. October data on homebuilding came in during the month and showed an unexpected drop of 11%. The default rate for prime mortgages for the third quarter came in at a three-decade high, as unemployment continued to pressure homeowners. Even the delinquency rate for lowest-risk, prime fixed-rate mortgages rose to 5.8% as the foreclosure inventory rose to 1.95%, the highest since at least 1972.

Investment Outlook

Looking forward, we believe that November’s economic reports confirm that the U.S. economic recovery, while underway, will be more protracted than the market originally expected, with consumer demand slow to recover and manufacturing providing a larger portion of the economic growth than usual. We continue to believe that the pace of cost cutting by businesses that continued for the past year is unsustainable, and that robust, long-term corporate earnings recovery will depend on improvements in the top-line growth.

Hence, we believe that a V-shaped recovery seems less likely, given the relatively weak demand story. The more likely outcome seems to be a gradual, smile-shaped, slow economic recovery that may prove to be more robust in the long run.

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