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By Pete Biebel, Senior Vice President

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That title is not meant to be either a political statement or any sort of prediction; it’s just a simple assessment of recent market action. The major averages wavered in relatively narrow ranges through the week despite the horrors of increasing COVID infections, inaction on a new stimulus bill and a second presidential debate. The prevailing attitude of traders seems to expect the potential for significant market volatility in the hours and days following next week’s election. Like a bronco rider at a rodeo waiting for the gate to open, traders are biding their time, making sure they have a firm grip on their strategies before the bucking commences.

Coming out of the chute last week, stock indices hit what turned out to be their highs of the week in the opening minutes on Monday before tumbling lower for the balance of the session. Weakness in many of the mega-cap tech stocks was a significant factor in Monday’s losses. The averages see-sawed sideways for the remainder of the week with their daily ranges narrowing each successive day. The S&P 500 Index (SPX) lost a little more than 0.5% for the week while the NASDAQ Composite Index (COMP) and the Dow Jones Industrial Average (DJIA) each decline about 1%.

As further evidence of the degree to which the big tech stocks dominate the performance of the major indices, note that the even-weighted S&P 500 Index had a net gain for the week of 0.65%. And, the lowly Russell 2000 Index of small-cap stocks (RUT) notched a 0.53% net gain. Those indices are less encumbered by big tech, so in a week in which the S&P Technology Sector Index was the poorest performing of the U.S equity sectors, the big cap-weighted and tech-heavy indices were the poorer performers.

Some of the more interest rate-sensitive sectors also performed poorly last week. Interest rates ratcheted higher through the week with the yield on 10-Year Treasury Notes rising from 0.76% to 0.85%. That’s a significant increase from its 0.65% level just a month ago and its highest level since June. The higher rates hurt the Consumer Staples and the Real Estate sectors.

Curiously, the higher rates didn’t seem to hurt the Utilities sector, which is typically the most sensitive to rising and falling rates. The Utilities sector was the second-best performing U.S. equity sector last week with a 1.2% gain. That performance seemingly went unnoticed by the financial media. No one seemed intrigued by the sector’s relatively strong performance in a week when rates spiked higher. My best guess at an explanation is that the prospect of a Biden victory could be expected to accelerate the trend toward less carbon-based energy generation, boosting the prospects for utility companies with big investments in renewable power sources.

Higher rates and a steepening yield curve also helped to breathe some life into the anemic Financials sector. The sector has been just flat for the past four months, churning sideways at levels well below its February high. The relatively small spread between short-term and long-term interest rates through the summer reduced banks’ profit potential on loans.  Over the past couple weeks, as long-term rates have spiked higher, short-term rates have barely budged. That steepening spread should help bank profitability. Regional banks, which derive a higher percentage of their revenues from their lending operations, are expected to enjoy a relatively greater benefit from a steepening yield curve. Last week, the S&P Financials sector, in which big banks make up nearly 40% of the sector’s weight, gained 1%. Meanwhile, an index that tracks the NASDAQ/ABA Community Bank Index gained nearly 7.5%.

In an otherwise lethargic week, stimulation from two distinct sources triggered brief spasms of activity. The first of those was news on progress or lack thereof in Congressional negotiations on a new economic stimulus package. Hints of a compromise spawned brief rallies, while news of further delays led to brief markdowns. The market seems convinced that some sort of package will be enacted sooner or later. The market believes stimulus is coming and is not too concerned about the exact timing. In other words, the expectation of further stimulus is already priced into the market.  That suggests that any celebration rally on news of a completed package will probably be short-lived.

Earnings news, not surprisingly, was the other source of brief, isolated spurts of volatility. But what was surprising was the disparity in how stocks reacted. Companies reporting better-than-expected earnings generally saw modest rallies in their stocks. But several companies that reported disappointing results saw their stocks lose 6% to 10% on the news.  Part of the reason for that phenomenon may be that earnings expectations had already been ratcheted lower in response to the COVID contagion. So, a company that beat reduced expectations was no big deal, but any that came up short of the revised expectations was a real disappointment.

A little more than one-quarter of companies on the S&P 500 has reported earnings through last Friday. This week will have the largest number of quarterly reports yet, including the five largest capitalization companies.

The economic report calendar is also unusually long this week. And, no, that’s not a typo on the GDP estimate.  Economists expect the data will show a huge rebound from the depressed COVID lockdown level in the second quarter.

Last week’s minor losses didn’t cause any technical damage. COMP and SPX both traded below their prior week lows but found support near their 50-day moving averages. The damage was well contained. But last week’s action did establish those lows as a critical area to watch in the coming weeks.  If COMP and/or SPX take out last week’s lows, it will also mean that the index has broken its 50-day and could lead to an acceleration in the downtrend.

Date

Report Previous

Consensus

Monday 10/26/2020

Chicago Fed National Activity Index, September

0.79

0.39
New Home Sales, September, SAAR

1,011K

1,016K

Dallas Fed Manufacturing Survey, October

13.6

13.3

Tuesday 10/27/2020 Durable Goods Orders, September, M/M

+0.4%

+0.4%

Durable Goods Orders, ex-Transportation

+0.4%

+0.4%

Case-Shiller House Price Index, August, M/M

+0.6%

+0.4%

FHFA House Price Index, August, M/M

+1.0%

+0.7%

Consumer Confidence, October

101.8

102.0

Richmond Fed Manufacturing Index, October

21

18

Wednesday 10/28/2020

International Trade in Goods, Trade Deficit, Sept.

$82.9B

$85.0B

Wholesale Inventories, September, M/M

+0.5%

+0.1%

Thursday 10/29/2020

GDP, Q3, Q/Q, SAAR

-31.4%

+30.9%

Initial Jobless Claims

787K

758K

Pending Home Sales, September, M/M

+8.8%

+3.5%

Friday 10/30/2020

Personal Income & Outlays, Income, Sept., M/M

-2.7%

+0.3%

Personal Income & Outlays, Spending, Sept., M/M

+1.0%

+1.0%

Employment Cost Index, Q3, Q/Q

+0.5%

+0.6%

Chicago PMI, October

62.4

58.0

Consumer Sentiment, October

81.2

81.2

October 26, 2020 |