Stocks delivered another week of gains despite mixed data and virus concerns
David Joy – Chief Market Strategist, Ameriprise Financial
Weekly markets commentary — Oct. 19, 2020
Despite no additional fiscal stimulus, surging virus infections, and an election now just two weeks away, U.S. equities managed to deliver another week of gains, albeit by the slimmest of margins. The S&P 500® index gained only 0.2 percent, but it was the third straight week of higher prices, after four straight weeks of declines. The index remains 2.7 percent below its September 2nd peak of 3580. The VIX index of implied volatility rose slightly to 27.4 from 25 the prior week, and although that is down from early September, it is elevated relative to the five-year average of 17. History suggests that volatility should peak approximately two weeks ahead of the election, followed by a steady decline, but that remains to be seen.
Bond yields edged lower, with the ten-year note dropping two basis points to 0.75 percent. But aside from last week, that is the highest weekly close since June 5. Financial stocks still slumped, after two weeks of gains, falling 1.0 percent on the week, while the KBW bank index fell 1.9 percent after third quarter earnings failed to inspire any enthusiasm for the group, despite several banks reporting significant earnings beats. Nevertheless, with ten percent of the S&P 500 having reported results so far, aggregate earnings expectations for the quarter continued to improve. Factset now anticipates an overall decline of 18.4 percent, down from -21 at the end of the quarter. Revenue expectations have also improved, with a now expected decline of 3.3 percent for the quarter compared to last year, an improvement from the expected 3.6 percent decline at the end of the quarter.
The coronavirus casts a shadow over the outlook for economic growth
The coronavirus continues to cast a pall over the outlook for the global economy. According to the CDC, the seven-day moving average of the number of new infections in the U.S. has been rising since September 12 when it totaled 34,371. It ended last week at 55,232. By comparison, its peak to date occurred on July 24 at 66,960. The virus is accelerating in Europe at an even faster rate, leading to the imposition of new social mobility restrictions. At the same time, on a more hopeful note, Pfizer said in an open letter posted on its website on Friday that it might know by the third week in November whether its vaccine currently in development is safe and effective, in which case it could apply to the FDA for emergency use.
On the economic front, the news last week in the U.S. continued to paint a mixed picture. Retail sales in September were much stronger than expected, but industrial production unexpectedly declined. Weekly jobless claims rose, while continuing claims fell. And both small business and consumer sentiment rose. Perhaps the one bright spot globally is China, which reported year-over-year GDP growth of 4.9 percent in the third quarter. And although that was lower than the Bloomberg consensus forecast of 5.5 percent, it was nevertheless an improvement from the 3.2 percent pace at the end of the second quarter and -6.8 percent at the end of the first, and not far off from the 6.0 percent pace at which it ended last year before the onset of the pandemic. In addition, the monthly data for September showed rising momentum in both retail sales and industrial production as the quarter drew to a close.
Investors wait for news on a stimulus package; economic data and earnings are top of mind this week
The prospects for an additional fiscal stimulus package remain alive to the extent that the two sides are still talking. Speaker Pelosi has established a deadline of this Tuesday if a deal is to be struck before the election. The White House and the Speaker seem to have closed the gap in terms of the proposed size of any package but appear to remain apart on the spending details. Senate republicans have expressed skepticism regarding the $2.2 trillion proposal currently on the table and are scheduled to vote on their own $500 billion proposal this week.
On the economic calendar this week in the U.S are existing and pending home sales, leading indicators, and flash PMIs. In addition, almost a fifth of S&P 500 companies will report earnings, including Proctor and Gamble, Netflix, Verizon, Tesla, Coca-Cola, and Intel.