Market Update: October 26th, 2020
Photo by Pedro Lastra on Unsplash
Economic data for the week included continued strength in housing data, an improvement in jobless claims, as well as continued growth in the index of leading economic indicators, albeit at a decelerated rate from the past few months.
U.S. equity markets declined with continued uncertainty over a Congressional stimulus package; foreign stocks echoed this sentiment but were also pulled down by another wave of COVID cases. Bonds fell back along with higher interest rates, tied to the size of the pending stimulus. Commodities were mixed with oil falling back, but offset by higher agricultural prices.
U.S. stocks ended generally lower for the week, with lessened hope for a broad stimulus package, rising Covid cases, and some uncertainty over the stop-start progress of ongoing vaccine clinical trials. However, small cap stocks came in positively and have begun to show signs of life—with hopes the group would benefit due to their higher economic sensitivity during an eventual recovery and currently attractive valuations. By sector, communications services, utilities, and financials fared best, with gains of over a percent; on the other hand, technology and consumer staples lagged with the largest losses. Real estate was also mixed, and not helped by rising interest rates.
The government’s newly released antitrust case against Google’s search engine appears to be narrower and less robust than some predicted, resulting in a rally of the firm’s shares. This perhaps foreshadows the type of case potentially brought against other tech firms, should a broadening of antitrust activity come to pass. Third quarter earnings appear mixed, with the general results faring better than initial expectations (of narrower year-over-year losses of -16% versus a -33% decline the prior quarter), and 85% reporting a positive earnings surprise. However, only a fifth of companies have reported so far. The year 2020 continues to be a viewed as a ‘wash’ for most companies, as views of the coming months shift to possible recovery trajectories in 2021 and 2022.
What’s the status of potential stimulus?
Following some optimism early in the week, the Senate was unable to come to an agreement, despite the relatively small monetary difference between the amounts proposed by House Speaker Pelosi, the Senate Republicans, and Treasury Secretary Mnuchin—with Pelosi noting that a deal was close. Remaining sticking points appear to be related to fiscal aid to certain states (that tend to run ‘blue’). Aside from the initial agreement remaining a problem, there remain ongoing concerns about getting a deal done in time for the election on Nov. 3. The results may undoubtedly play the largest role in when and how much additional stimulus comes together later, although there seems to be a consensus view that some type of stimulus is inevitable, especially considering the recent uptick again in COVID cases.
Foreign stocks ended the week barely positive in U.S. dollar-investor terms, with Europe, U.K., and Japan generally performing in line. Europe continues to be plagued by an again worsening pandemic environment, with curfews and lockdowns being put back in place in several countries. The ECB noted concern over economic recovery losing momentum given the continued uncertainty, which has weighed on confidence. Emerging markets outperformed with the best returns for the week, largely led by regions outside of China, including Brazil, Russia, Mexico, and South Africa.
U.S. bonds declined overall, as interest rates ticked higher along with an expected (expensive) stimulus package growing closer. This was also the likely catalyst for U.S. dollar weakness. Nevertheless, high yield outperformed investment grade for the week. Foreign debt benefitted from the weaker dollar in developed markets and emerging market local currency markets, while dollar-denominated EM declined.
Commodities were mixed last week, despite the usual aid of a weaker dollar. Agriculture prices rose, as drought conditions in a variety of areas threatened harvests, and industrial metals prices rose with improved optimism about global economic prospects. In energy, the price of West Texas crude oil fell by -3% to a few cents under $40/barrel, due to a continued rise in COVID cases threatening demand. On the other hand, natural gas prices spiked temporarily, as technical conditions of prices rising above $3 blended with forecasts of colder weather heating needs.