By Pete Biebel, Senior Vice PresidentPrint This Post
That song is Number 13 on one entity’s list of the 25 funniest country music song titles. Call me lazy or unimaginative, but when I’m at a loss for a title that characterizes recent market action, country music lyrics represent a target-rich environment.
Where the steep market losses in the previous week might have merited Number 21 on the list: “You Done Tore Out My Heart and Stomped That Sucker Flat,” last week the market was in much more of a lovey-dovey mood. Where the market had feared an ugly outcome of last week’s election, it is now, at least temporarily, starry-eyed giddily enamored with the results.
The markets are forward-looking, generally discounting conditions that are expected six to 12 months or more in the future. But last week they seemed to focus on the here and now. They celebrated the lack of a blue sweep in the election results apparently on the theory that it greatly reduced the potential for significant near-term changes to regulations or tax rates. The markets seemed to divorce themselves of any concerns about what shortcomings congressional gridlock might cause in the weeks and months ahead.
Following a week in which the major averages were in the red all week, they spent all of last week in the green. Following a week in which everything was down, last week prices in nearly every asset class and every sector advanced. Following a week in which the major averages had their worst week in months, last week’s celebration produced the best weekly gains since April. The NASDAQ Composite Index (COMP) added a tick over 9%, led by big gains in tech stocks. The less tech-heavy S&P 500 Index (SPX) and the Dow Jones Industrial Average (DJIA) each climbed about 7%. None of those indices got back to their September highs, but both COMP and SPX ended the week at new weekly closing highs. For just the fourth time in more than 80 years, SPX had four consecutive sessions with at least a 1% gain.
The first four sessions of the week all enjoyed gap-up openings, though the gains usually peaked early in the day and the averages settled into the middle of their ranges into the close. As the week began, the market was coming off consecutive losing weeks and consecutive losing months. A much stronger than expected report for the Purchasing Managers Index on Monday morning helped stocks get off to a good start. PMI for October came in at 59.3 versus expectations of something in the 54 to 56 range. That October reading was the highest in more than two years.
By Wednesday morning, the election results had pretty much eliminated the potential for a blue sweep, and by Thursday morning that was more or less confirmed. The averages gapped higher and racked up big gains in the opening 30 minutes of trading both days. Oddly, Friday was the only morning that didn’t have a gap-up opening. Odd because the employment numbers that morning were much better that expected. The BLS reported that morning that Non-Farm Payrolls increased by 638,000 in October, well ahead of expectations in the 530,000 to 600,000 range. They also reported that the unemployment rate fell by a full 100 basis points to 6.9% versus a consensus guess of 7.7%. Yet, in spite of that news, the market had just a flattish opening and its dullest sessions in weeks.
Last week, I suggested that mechanical selling probably played a significant role in the prior week’s big losses. Stop-loss selling triggered more stop-loss selling. Risk parity funds had to reduce positions as volatility spiked higher. That phenomenon probably reversed last week; those forced sellers became forced buyers when the averages repeatedly gapped higher and volatility plunged. The incredibly bullish response to the election results probably also forced a rush of short-covering by traders who were betting on a negative reaction.
Weakness in the U.S. dollar also played a role in the appreciation in many non-U.S. equity sectors. The Wall Street Journal U.S. Dollar Index was near its highs of the past three months just above 94 as the week began. But that index fell to near 92 and its year-to-date lows as the election results became more certain. That dollar weakness helped many foreign market indices, both developed and emerging, enjoy significant gains last week. One index of Germany’s stock market gained nearly as much as COMP last week in dollar terms. Gold and silver had their best week in about four months in part due to the dollar weakness.
Number 9 on the country song list was, “I Keep Forgettin’ I Forgot About You.” That sentiment seems to fit the market’s level of concern, or lack thereof, over the continuing high rate of new COVID infections. The increasing numbers seemed to worry the market a couple weeks ago, but the election results were apparently enough to trump the impact of the contagion. The COVID numbers haven’t gotten any better lately; we’re all still waiting to see a peak and some decline in the daily national numbers. If those don’t occur in the next week or two, then it might be hard for the market to continue forgettin’.
As mentioned above, SPX had its highest weekly close ever at a bit above 3509. The late-October low is all the way back near 3234, and the 200-day moving average is about 100 points below that. The only nearby technical level to watch is SPX’s 50-day moving average just above 3400 and roughly in the middle of that index’s range over the past three months.
This week’s economic report calendar is very short and the reports that are due are unlikely to be significant catalysts. Several of the regional Fed Presidents are scheduled for speaking engagements this week.
|Tuesday 11/10/2020||NFIB Small Business Optimism Index, October||104.0||105.3|
|JOLTS Job Openings, September||6.493mm||6.508mm|
|Thursday 11/12/2020||Initial Jobless Claims.||751K||741K|
|Consumer Price Index, October, M/M||+0.2%||+0.2%|
|CPI less Food & Energy, October, M/M||+0.2%||+0.2%|
|Friday 11/13/2020||Producer Price Index, October, M/M||+0.4%||+0.2%|
|PPI less Food & Energy, October, M/M||+0.4%||+0.2%|
|Consumer Sentiment, November||81.8||82.0|