Markets react to rising virus cases and stimulus uncertainty
David Joy – Chief Market Strategist, Ameriprise Financial
Weekly markets commentary — Oct. 26, 2020
No movement on a new stimulus package last week left investors watching and waiting. Stocks fell slightly on the lack of movement, with the S&P 500® index losing 0.5 percent. That broke a string of three consecutive weekly gains and left the index roughly flat over the past two weeks. With the election just one week away, volatility barely budged, and has itself been mostly flat for the past six weeks.
The bigger story was in the bond market, where the yield on the ten-year Treasury surged higher by nine basis points to 0.84 percent, its highest weekly close since June 5. The recent climb in yield has left the ten-year above its 50 and 100-day moving averages, and just below its 200-day moving average of 0.86 percent, which has been downward sloping since it reached 2.96 percent on December 6, 2018. Notably, high yield spreads continued to narrow, and are now back to where they were in early March, just as the sharp selloff was gathering steam.
Last week’s economic data was encouraging, but not enough to overcome the absence of definitive progress on new stimulus. The housing sector continued its show of strength as the National Assocition of Home Builders (NAHB) index, starts and permits, and existing home sales all rose. And the flash PMIs rose, especially the service component, which pushed the composite index to its highest level since February, 2019. And the weekly and continuous jobless claims reports were both better than expected.
Unfortunately, the news on the coronavirus was less encouraging. The U.S. established a new high of 83,757 daily infections on Friday, with sixteen states also setting single-day records. Europe is dealing with a similar surge and is imposing new social restrictions. The brake on activity was reflected in the slumping Eurozone composite flash PMI, which fell to 49.4 on weakness in services, its first reading below 50 since June. In one hopeful sign, last week the FDA approved the drug remdesivir from Gilead Sciences for use in treating patients hospitalized with the virus. While that is not the same as a vaccine, progress is being made. Oxford University reported some positive results among the elderly in its vaccine trial.
Third quarter GDP likely to set record growth
This week’s economic calendar includes what will surely be the record setting advance estimate of third quarter GDP on Thursday. After the second quarter decline of 31.4 percent, the Bloomberg consensus anticipates annualized growth of 31.8 percent. Such growth would virtually double the next highest reading in the postwar era of 16.7 percent in the first quarter of 1950, which itself followed a 3.3 percent decline in the fourth quarter of 1949, a year in which the economy shrank by 0.6 percent. Also on the calendar this week are new and pending home sales, durable goods orders, consumer confidence, and personal income and spending. In the Eurozone, third quarter GDP is also scheduled, and the European Central Bank (ECB) is scheduled to meet. Germany will also report third quarter GDP, as well as September retail sales. China’s PMIs will be released at the end of the week.
Earnings continue to improve; investors focus on potential stimulus
The earnings picture continues to improve. Factset now estimates third quarter earnings will decline by 16.5 percent. That compares to its forecast of -18.4 percent just last week, and -21 percent at the start of the quarter. Companies scheduled to report this week include 3M, Caterpillar, Merck, Microsoft, Pfizer, Ford, UPS, Alphabet, Amazon, Apple and Facebook.
On the political calendar, the Senate votes on Amy Coney Barrett’s confirmation to the Supreme Court, the final campaign push ahead of the election continues, and presumably Speaker Pelosi and Secretary Mnuchin will continue talking about another round of stimulus.