Down, Yonder

Down, yonder.  Stocks rallied yesterday, led by value shares as investors wondered how good it would be to have a stimulus package before the November 3rd election.  Encouraging weekly employment data helped fuel the positivity of the day.

N O T E W O R T H Y

One for you, two for me, two for you…  The horse trading continues in DC.  The middle ranks are talking while the generals continue to hurl insults to keep in form.  The news from the field appears to be leaning positive, which was a factor in yesterday's market rise.  Taking a step back, let’s look at both sides. First, what could go right.  A substantive, but focused, no-partisan stimulus bill.  It’s not just anecdotal, consumers have been spending less since the CARES Act stimulus began to erode.  The smartest, and most powerful bankers in the world, The US Federal Reserve, has been going, literally, out of its way to make it clear that more fiscal stimulus will be needed to maintain the pace of the recovery.  While it is a pretty good bet that lawmakers of every ilk believe that more stimulus is needed, politics and posturing have gotten in the way of closure. It is election season and that is just… bad luck… I guess.  Anyway, the tide has appeared to turn somewhat with House Democrats willing to work with the Administration to agree on some form of stimulus… you know, like in the olden days.  Little bits of positive information continue to leak into the press, which has been buoying markets this week. Unfortunately, any agreement would have to be voted on by the Senate, which appears hunkered down until elections, with little sympathy for the olden days.  But still, the recent negotiations show that a substantive deal can be reached, and hopefully soon. That optimism has caused a noticeable shift in the markets. Yesterday’s rally was led by value stock regulars: banking and energy.  The two sectors, which have been so badly punished over the past year, caught a hefty bid (that is Wall Street talk for: traders bought them… big) yesterday. Earlier this week, I pointed out that small cap stocks have also been showing some signs of life. Those stocks are a better representation of the real economy and would significantly benefit from more stimulus and an economic recovery.  We have noticed that trade in the Russell 2000 small cap index has some spring in its foot this week and it outpaced the usual suspect S&P and Nasdaq yesterday.  I also reported this week on the steepening of the yield curve, which is a sign that bond investors, too, believe that a recovery is sustainable.  Side note: bond traders rarely follow equity traders, so concurrence is… well, positive.  Yesterday’s weekly employment number gave further support to the case for economic recovery as the numbers for initial and continuing jobless claims, while still high, came in far lower than expected and last week’s disappointing numbers were revised down. On the COVID vaccine front, it is clear that we are getting closer to some positive developments.  Paused trials have begun to resume and the leaders are closing in on an approval, now expected before the end of the year.  Last night, WHILE YOU SLEPT, Gilead Sciences (GILD) received FDA approval for Remdesivir to treat COVID.  While not surprising, and questionably effective, it is a positive development.  We have not yet turned the corner, but the corner is getting closer.  A continuation of these trends would be quite positive.  However with so many moving parts, conditions can quickly change. Here is what could go wrong.  The DC narrative can quickly change in the days, if not hours ahead. Lest we forget, elections are only days away and there is A LOT at stake for not only the White House, but also for the upper chamber.  Surprising election results or a challenge to the elections efficacy could throw a devastating spanner into the works.  While the polls show Biden in the lead, the lead is narrowing and a narrow victory for either sider almost assures that the results will be contested.  That would certainly not be positive in the near term.  In case you haven’t already heard, COVID cases are spiking once again in the US and abroad.  In the UK and EU, lockdowns have reappeared in certain regions and flash PMI numbers which came out last night, WHILE YOU SLEPT, show a pullback in economic activity as a result.  PMIs are one of the best high frequency indicators of economic health and are a good forecaster of GDP.  For now, the US spikes are smaller than the overseas ones and they will hopefully not get to the point where lockdowns are once again necessary.  This morning, we will get the PMIs for the US, which are expected to show continued expansion.  Should the virus spike match that of the Eurozone, those numbers can change drastically in the month ahead.  In conclusion, there is a lot that could go right but there is still plenty that could go wrong as well.  In addition to sticking with your core investment strategy, staying healthy and voting would seem to be the best way to minimize the negatives.

THE MARKETS

Stocks rose yesterday on what appeared to be positive developments in stimulus negotiations.  Upbeat, but still bad, employment numbers also contributed to the rally.  The S&P500 traded up by +.052%, the Dow Jones Industrial Average climbed by +0.54%, the Russell 2000 leapt by +1.65%, and the Nasdaq Composite Index advanced by +0.19%.  Bonds showed further weakness and the 10-year treasury yields climbed by +3 basis points to 0.85%.

NXT UP

- Markit Manufacturing PMI (Oct) is expected to have grown slightly to 53.5 from 53.2.

- Markit Services PMI (Oct) may have remained constant at 54.6.

- Next week brings another big load of earnings along with more housing numbers, Durable Goods Orders, Consumer Confidence, regional Fed reports, GDP, PCE Deflators, and University Michigan Sentiment.  That is a lot to take in, so check back on Monday for calendars and more details.

daily chartbook 2020-10-23