Weekly Market Update - October 30, 2020

Stocks hammered on the week despite a jump in GDP growth as Covid continues to dominate worldwide.

• The major U.S. stock indices retreated significantly on the week, as earnings continued to disappoint, stimulus talks went nowhere, the world continued to deal with record COVID cases, and the U.S. presidential election introduced more uncertainty

• The DJIA and small-cap Russell 2000 both lost more than 6%, with the DJIA losing 6.5% and the Russell 2000 dropping 6.2%

• The S&P 500 and NASDAQ were not much better, dropping 5.6% and 5.5%, respectively

• As much as the past few weeks have brought positive economic news, this week there seemed to be an abundance of negative news: more lockdowns over in Europe, Pfizer delaying the release of its Phase 3 vaccine results and new home sales declining in September

• The one positive economic news – and it was data that requires perspective – was when the Commerce Department released GDP information stating that third quarter GDP grew 33.1%

• All the S&P 500 sectors dropped on the week, with the Information Technology and Industrials sectors both losing 6.5% and with the Utilities sector turning in the best performance with a decline of 3.5%

• The 2-year yield decreased to 0.15% while the 10-year Treasury yield increased two basis points to 0.86%

• The U.S. Dollar Index advanced 1.3%

• WTI crude futures dropped 10.5% to $35.70/barrel

Stocks Retreat Amidst Headwinds and Tailwinds

The major U.S. stock indices all retreated significantly on the week, with the smaller-cap Russell 2000 and the mega-cap DJIA dropping more than 6% and both the tech-laden NASDAQ and large-cap S&P 500 losing more than 5%. With the exception of the S&P 500, the indices moved into correction territory again (down 10% from recent highs).

As with the week before, much of the dominant news was on what didn’t happen – namely, an announcement of another round of stimulus out of Washington. As the week progressed, Wall Street and Main Street were disappointed that another stimulus bill wouldn’t be passed until after the election, and maybe not until 2021.

On the earnings front, it was a very busy week, with the week seeing lots of earnings surprises – so many, in fact, that if the trend continues, it will be a record quarter for so many earnings surprises. But surprise earnings don’t necessarily translate into positive share movement, as Apple, Amazon and Facebook all witnessed when their stock prices retreated despite exceeding expectations for the quarter.

GDP Sets Record for Third Quarter

On Thursday, the Commerce Department reported that the “Advance Estimate” of Third Quarter 2020 GDP increased at an annual rate of 33.1%. It is the best quarterly increase in history. Not only is it the biggest GDP gain of all time, but it’s more than double the previous record (which was about 16%).

While perspective is of course needed, given the second quarter contraction of 31.4%, the third quarter GDP increase was beyond consensus expectations, driven by consumer spending. In fact, consumer spending leapt by an annual rate of more than 40%, adding about 25 percentage points to the GDP number.

There were increases almost across the board – residential investment and business investment increased – while government consumption actually held the GDP back some.

Then on Friday, the Commerce Department further reported that:

• Personal income increased $170.3 billion (0.9%) in September

• Disposable personal income increased $150.3 billion (0.9%)

• Personal consumption expenditures increased $201.4 billion (1.4%)

Further, the PCE price index increased 0.2 percent; and excluding food and energy, the PCE price index still increased 0.2 percent.

Pending Home Sales Decline

The National Association of Realtors reported that pending home sales declined in September after four consecutive months of increases. The good news is that all four major regions in the U.S. did show year-over-year gains. From the release:

“The Pending Home Sales Index, a forward-looking indicator of home sales based on contract signings, fell 2.2% to 130.0 in September. Year-over-year, contract signings rose 20.5%. An index of 100 is equal to the level of contract activity in 2001.

” Further:

• The Northeast grew 2.0% to 119.4 in September, a 27.7% increase from a year ago • In the Midwest, the index slid 3.2% to 120.5 last month, up 18.5% from September 2019

• The South decreased 3.0% to 150.1 in September, up 19.6% from September 2019

• The West fell 2.6% in September to 116.8, up 19.3% from a year ago

Manufacturing Down Nationwide (except Texas)

According to the release from the Federal Reserve Bank of Chicago on Monday, manufacturing production moved negative, while the contribution from employment was cut by about half. More specifically from the release:

“Led by some further moderation in the growth of production- and employment-related indicators, the Chicago Fed National Activity Index declined to +0.27 in September from +1.11 in August. Three of the four broad categories of indicators used to construct the index made positive contributions in September, but three of the four categories decreased from August. The index’s three-month moving average, CFNAI-MA3, moved down to +1.33 in September from +3.22 in August.”

The conclusion to be drawn is that there was a decrease in industrial production, which might indicate that the recovery is slowing down. But in Texas…

According to the release from the Federal Reserve Bank of Dallas – also on Monday – Texas factory activity advanced again, marking the fifth such month of advances. Directly from the release: “The production index, a key measure of state manufacturing conditions, rose three points to 25.5, indicating a slight acceleration in output growth.

Other measures of manufacturing activity also point to stronger growth this month. The new orders index advanced five points to 19.9, and the growth rate of orders index inched up to 14.3. The capacity utilization index rose from 17.5 to 23.0, while the shipments index was largely unchanged at 21.9.”

Further, the Dallas Fed reported that perceptions of broader business conditions continued to improve in October as:

• The general business activity index pushed further above average, coming in at 19.8, a two-year high and

• The company outlook index moved up three points to 17.8, also a two-year high.

A Very Busy Earnings Week

Research firm FactSet reported on Friday that the percentage of S&P 500 companies beating EPS estimates for the third quarter and the magnitude of the earnings beats are beyond record levels. Yet, despite the increase in earnings, the index is still reporting the third largest year-over-year decline in earnings since Q3 2009, mainly due to the negative impact of COVID-19.

Directly from the FactSet release:

“Overall, 64% of the companies in the S&P 500 have reported actual results for Q3 2020 to date. Of these companies, 86% have reported actual EPS above estimates, which is well above the five-year average of 73%. If 86% is the final percentage for the quarter, it will mark the highest percentage of S&P 500 companies reporting a positive EPS surprise since FactSet began tracking this metric in 2008. The current record is 84%, which occurred in Q2 2020. In aggregate, these companies are reporting earnings that are 19.3% above the estimates, which is also well above the five-year average of 5.6%. If 19.3% is the final percentage for the quarter, it will mark the second largest earnings surprise percentage reported by the index since FactSet began tracking this metric in 2008, trailing only the 23.1% earnings surprise percentage recorded in the previous quarter.”

Sources: bea.gov; nar.reator; factset.com; chicagofed.org; dallasfed.org; factset.com; fidelity.com; msci.com; Nasdaq.com; wsj.com; Morningstar.com;

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