Market Pulse - 30 October 2020

Dow logs worst week and month since March 

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Volatility has dominated markets just one week before the US elections. Investors have been spooked by record high in COVID-19 infections in the US, fresh lockdowns in Europe that threaten economic growth, and a mixed bag of earnings from big tech.

Markets are concerned that we could be headed for a similar scenario that we saw in February and March; however, that scenario is unlikely given a better understanding of the virus and the development of therapeutics. That being said, the uptick in cases and lockdowns in Europe and now in some cities in the US should not be taken lightly.

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Volatility Increases

September and October typically tend to be the most volatile months of the year, and this year is shaping up to be no different. The impact of a second wave of COVID-19 is a black swan event and one of the most important elections in recent history, has understandably exacerbated volatility.

Volatility ahead of an election is not unusual and often a buying opportunity. In the two weeks prior to the 2016 election (10/24-11/4), the S&P 500 was down for ten straight days and fell -3.07% only to rally 52% to date. 

We have seen a similar reaction in the markets this week ahead of the 2020 election and a global COVID-19 resurgence. The Dow Jones closed the week down -6.5%, the S&P 500 down -6.1%, and the Nasdaq down 5.5%. The close in markets this afternoon was encouraging as the Dow was down 495 points (-1.86%), only to rally back in the last hour of trading to close the day down 157 points (-0.59%).

Economic data remains strong, but we need another stimulus deal...fast.

The economy grew at a record pace in the third quarter as GDP increased 7.4% compared to last quarter and increased 33.1% compared to Q3 2019. 

The number of individuals filing initial claims for unemployment insurance fell by 40,000 to 751,000 last week, the lowest level since the start of the COVID-19 pandemic, suggesting layoffs are easing despite a rise in coronavirus infections. The US as of September has recovered about half of the 22 million jobs lost in March and April, at the beginning of the pandemic. 

The US consumer continued to fuel the recovery as households boosted spending for the fifth straight month. The Commerce Department said personal-consumption expenditures, a measure of household spending on goods and services, rose 1.4% last month. Consumers have increased spending since the summer, although the pace of gains slowed into early fall.

Personal income, a measure of what households receive from wages and salaries, government aid and investments, was up last 0.9% month, after a sharp decline in August, rising on higher pay and remaining pandemic-related aid.

Consumers last month spent more on autos, clothing, and footwear, continuing a trend of robust outlays on goods due to pent-up demand from pandemic-related economic disruptions.

The housing market in the US remained strong as the Commerce Department reported that the homeownership rate rose to 67.4% in the third quarter, up from 64.8% a year earlier but down from 67.9% in the second quarter. Sales of previously owned homes rose 2% in August from a month earlier, as low mortgage rates and a desire for more space lured buyers into the market. A shortage of homes for sale has led to competition among buyers and pushed home prices higher.

Earnings front and center, especially big tech.

On the face of things, earnings have been very strong for Q3 2020. Out of the 320 S&P 500 companies that have reported earnings to date, 86% have beat estimates on average by 20.4%. To put this into context, the average historic average beat is 3-5%. The market hasn’t reacted as positively as one might think. Fears of a contested election and uptick in COVID-19 cases has overshadowed a strong earnings season.

Big tech earnings were also strong, as Facebook, Amazon, Apple, and Google all beat revenue and earnings expectations; however, these stocks have run up significantly in recent months and really had to report perfect quarters for the market to react positively. The market nit-picked, as user growth at Twitter and Facebook slowed, and iPhone sales slowed from a year ago ahead of the company’s 5G iPhone release to start Q4. Amazon reported record revenue of $96 billion and profits tripled to $6.3 billion in Q3; however, provided cautious guidance for the fourth quarter.

Year-end outlook.

I believe the recent sell-off in markets poses a buying opportunity for cash that has been kept on the sidelines for a better entry point into equities. While the headlines seem frightening at the moment, the chance of a double-dip recession remains very low, as I remain optimistic that a stimulus bill will be agreed upon sooner rather than later, COVID-19 treatments reduce the likelihood of nationwide shutdowns, a vaccine to come in 2021, and the underlying economic data and earnings of US companies remain strong and make a bullish case for 2021 recovery.

As we enter the transition from the early stage of the business cycle to the mid-stage, areas that we are overweight are US technology, US cyclicals (industrials, consumer discretionary, and infrastructure), US small-caps, and Gold.