Ghoulish. Stocks took a turn down giving up gains made on Thursday as nerves were exposed. Earnings disappoint, election discomfort, and virus fears fed the selloff which was led by the once-loved technology sector.
N O T E W O R T H Y
Temptation. It’s the Monday before the second Tuesday of November… in an election year… a Presidential one… a fractious one… in the midst of a re-surging pandemic… in the middle of earnings season… nerves are raw. That about sums it all up, doesn’t it? All of the national polls put Biden in the lead, the House remaining Democrat, and the Senate up for grabs. Swing state polls give Biden a slight edge over Trump and many folks have already voted, but still many plan to vote in person tomorrow, and some mail-in votes (there were a lot of those too) need to be accounted for. Many folks believe that they know what the results of the elections will be and may be tempted to take speculative positions based on their advanced knowledge. If one of them is you, you are probably best advised to avoid the temptation. I will give you two bits of information starting with the most obvious one. First of all, you don’t know who will win the election. In case you forgot, polling in 2016 failed to correctly predict the Presidential outcome. While pollsters have fixed some of the holes found in 2016, this current election has a far more polarized electorate, which will lead to result volatility and diminished predictability. Second, I will use a phrase from the Wall Street Adages Manual: “Buy the rumor, sell the news”. The saying means that markets typically go up in anticipation of some sort of bullish news only to sell off once the actual bullish news is revealed. Well, there appear to be many signs that markets are factoring in some sort of blue wave. A Democrat-dominated Washington seems to imply big spending, starting with a long-awaited, and much needed stimulus package. Stocks always like Government spending, and though stocks were down last month, the driver for the fall was principally the surge in virus cases and a new wave of EU lockdowns. The pullback in stocks would likely have been far worse if a Biden victory - with more stimulus - were not being factored in. Bonds are telling a clearer, more simple story. Ten-year treasury yields rose by nearly +20 basis points last month as bond investors anticipate future stimulus-induced inflation. There are many additional, more-subtle signs that markets are factoring in a Democratic wave. So, it appears that the rumor has been bought.
If a blue wave does, in fact, wash over DC in the coming weeks, will the news be sold? If I have said it once, I will say it again: markets rarely do what is convenient for you. In other words, we just don’t know. I can recall speaking to colleagues leading up to the 2016 election and the almost unanimous consensus was that a surprise Trump win would send the markets into a tailspin, and wouldn’t you know it… they were all dead-wrong. The bottom line is that you may think you know who will win in tomorrow’s election, but you certainly don’t know how the market might react. The week ahead is jam-packed with critical economic data, earnings releases, and even a Fed policy meeting. Add to that the potential for election result uncertainty and the start of a new wave of EU lockdowns, and you have a recipe for volatility. Avoid the temptation to speculate. Instead, focus on your long term core investment strategy.
THE MARKETS
Stocks sold off on Friday capping off the worst weekly losses since March. The selloff was driven by surges in virus cases, EU lockdowns, and disappointing results from the technology companies that dominate the major indices. The S&P500 fell by -1.21%, the Dow Jones Industrial Average dropped by -0.59%, the Russell 2000 Index sold off by -1.48%, and the Nasdaq Composite Index slid by -2.45%. Bonds also gave up ground and 10-year treasury yields climbed by +5 basis points to 0.87%. Crude oil slipped another -1.05% to $35.79 on pandemic-related reduced demand and a spike in supply from Libya.
NXT UP
- Markit Manufacturing PMI (Oct) is expected to come in at 53.3, unchanged from prior estimates.
- ISM Manufacturing PMI (Oct) is expected to have risen to 56.0 from 55.4.
- Construction Spending (Sept) may have increased by +1.0%, slightly less than the prior month’s +1.4% growth.
- This morning, Estee Lauder, Marathon Petroleum, Clorox, FirstEnergy, Horizon Therapeutics, and Waste Management beat while US Foods and AMC Networks missed. After the closing bell, we will hear from Diamondback Energy, PayPal, Williams, SBA Communications, Realty Income Corp, Skyworks Solutions, and Transocean.
- The week ahead is loaded with more earnings in addition to Factory Orders, Durable Goods Orders, vehicle sales, services PMIs, monthly employment situation, and the FOMC meeting and press conference. Refer to the attached economics and earnings release calendars for details.