Wait, What?

Wait, what?  Stocks were up yesterday… and they were down, a lot, leaving many confused about what caused the selloff. The housing market remains strong according to the latest release by the National Association of Home Builders, whose market index hit an all-time high.

N O T E W O R T H Y

A mixed-up narrative.  Never mind a red wave or a blue wave, markets have been doused with a wave of complacency in recent weeks.  The three major issues at hand for investors are a) stimulus, b) the elections, and c) a new potential COVID surge.  Let’s work our way backwards, shall we?  We are getting close.  Though some of the contestants in the race for a vaccine have been temporarily sidelined, others are proceeding to the finish line and there are still more behind them.  Yesterday, the Wall Street Journal reported that Moderna will have Phase 3 interim results in November and that emergency use may be available as early as December. Similar positive news has been pervasive in recent weeks.  The President’s quick return after being stricken with the virus also served as a reminder that there are treatments, though experimental, that may be effective.  Because of these, investors appear to have given the recent virus surge a pass. Now on to the elections.  Early in the summer, investors feared a blue wave on the misplaced belief that a Democratic president would be bad for the market.  As Biden’s chances improved in the polls, volatility initially picked up, but soon after, a positive narrative emerged around a blue wave. Factually, the markets have historically behaved the same or significantly better with a Democrat in the Whitehouse. Additionally, Democrats are known to spend more, which is generally good for stocks and not so good for the deficit.  Who cares about the deficit, it has already been ravaged by the 2017 tax package and the CARES Act… what’s a few more trillion here or there?  That was my attempt at humor.  My regular readers know that I am very much against a bloated deficit, but the fact remains that the markets are less concerned with it these days.  So we have a positive narrative for a blue wave.  But what if the tide turns, as it did in 2016, and Trump wins a second term?  Don’t worry, we have a positive narrative for that as well.  A red wave could mean no new taxes or maybe even further tax cuts.  That would be good for consumers (more money to spend) and companies would have more cash to do stock buybacks again… once things get a little better.  So, you see, there are positive narratives on both sides of the election.  Now, on to the stimulus… or lack thereof. This topic has really dominated the market in the past few weeks, and for good reason.  Support from the CARES Act has all but dried up and there are many signs that the economic recovery is stalling.  To be clear the economy is not on life support, but some form of follow-on stimulus appears to be needed to carry the recovery over the finish line.  The problem is getting Dems and the GOP to agree on a package.  That would be difficult in any circumstance, let alone in the weeks before a contentious election.  We have two parties, two chambers, and the President, all with separate private agendas. But, hope abounds as the parties are all still talking.  The Dems want something big and now the President wants something… bigger, but Senate Republicans want something really small… for now.  One day we hear that they are all getting closer only to hear that a deal won’t happen on the next… only to hear that they are once again closer.  The fact that everyone is still talking is positive, indeed, but the likelihood of a deal before the election appears to be low.  Not to worry, there is a good narrative about that too.  Once the election is out of the way, no matter what color the wave, many expect a big stimulus package to come.  Notice the theme here?  All of the narratives seem to support further growth in the stock market.  I have struggled to find a popular contrarian narrative, but the pickings are slim, leaving me somewhat puzzled, if not concerned.  While that may be good for now, some of these narratives are going to have to deliver at some point or things can get tricky at these heights with such high valuations and expectations.  One thing that is certain is that we can expect more volatility in weeks ahead as more reality… and new narratives... emerge.

THE MARKETS

Stocks gave up early gains to end the session in a sharp selloff as hopes for a near term stimulus package appear to be fading.  The S&P500 sold off by -1.63%,  the Dow Jones Industrial Average dropped by -1.44%, the Russell 2000 Index slipped by -1.24%, and Nasdaq Composite erased -1.65%.  Bonds also slipped yesterday and 10-year treasury yields climbed by +2 basis points to 0.76%.

NXT UP

- Housing Starts (Sept) are expected to have grown by +3.5% compared to last month’s -5.1% slide.

- Building Permits (Sept) may have risen by +3.0%, compared to the prior periods loss of -0.5%.

- More Fed speak today which includes Quarles, Evans, Singh, Brainard, and Bostic.

- This morning, Philip Morris and Proctor & Gamble beat estimates, while Signature Bank and Synchrony Financial missed.  We expect to hear from Prologis, Albertsons, and Lockheed Martin before the bell.  After the close earnings include Netflix, Texas Instruments, Tenet Healthcare, iRobot, and Snap.

daily chartbook 2020-10-20