By Pete Biebel, Senior Vice PresidentPrint This Post
Many stocks and sectors racked up big gains last week. Many had their best week in months. In a week when four of the five sessions enjoyed gap-up openings, the averages soared steadily and unflinchingly higher, like a jumbo jet climbing after takeoff. Well almost. The ascent hit a nerve-rattling, panic-inducing air pocket on Tuesday afternoon when the averages gave back all of their gains for the week in a tweet-induced, 30-minute plunge. Thankfully, the interruption was brief, and the market was back gaining altitude the next morning and for the balance of the week.
That Tuesday air pocket was the direct result of an announcement by President Trump that he had instructed his representatives to halt negotiations on the pending stimulus bill until after the election. Much of the market’s rebound since the September low has been fueled by hopes that Congress would soon pass another massive stimulus package. In recent weeks the market had been trained to respond positively to any news of progress in the negotiations. It’s understandable then that Tuesday’s news caused an instant, reactionary spasm.
Late in the morning on Thursday, there was a second though minor interruption in the market’s climb when headlines proclaimed that House Speaker Pelosi was rejecting any sort of “skinny” stimulus package. This was in response to a proposal that a bill providing relief for airlines should proceed in the absence of agreement on a more wide-ranging package. So, again it looked as though the big stimulus would be delayed, but this time the reaction was far less turbulent. The averages eased lower for an hour or two but didn’t even fall into the red for the day.
For the week, the NASDAQ Composite Index (COMP) rose 4.6% and has now recovered a little more than two-thirds of its September loss. The S&P 500 Index (SPX) advanced 3.8%, effectively doubling its year-to-date gain. The Dow Jones Industrial Average (DJIA) added just 3.3% but that was more than enough to lift it back into positive territory year-to-date. Worth noting is that the Russell 2000 Index of small-cap stocks (RUT) tacked on a whopping 7%, lifting it back to within a couple percentage points of where it began the year.
The lesson from last week’s action is that the market doesn’t care too much about the exact timing of the stimulus legislation; it believes a bill will be passed eventually, therefore a few weeks one way or the other is of little consequence. The belief of traders is that the stimulus will eventually come, improving the economy’s recovery speed and corporate profitability over the months ahead.
It’s interesting that in a week with a couple of big political flip-flops, the market didn’t seem to care. Those reversals seemed to have been driven directly by voter polls showing the president falling further behind. His early-week stalling stance was a distant memory late in the week as he was suddenly in favor of a stimulus package much larger than what his own party sought. One can only suppose that he believes passage of a big, fat bill in the next week or two would increase his odds of re-election. Speaker Pelosi shifted from chastising Republicans for dragging their feet on the legislation to being in no rush to provide additional aid before the election. One can only suppose that she believes delaying the bill will hurt the Republicans in the election much more than the Democrats. For Donald and Nancy, the election is all that matters now.
The market seems to have done its own flip-flop with respect to its expectations of the economic impact of the various election outcomes. Several weeks ago, one major concern was the likelihood of a contested election. That seems much less likely now and that realization has been a positive for the market. Also, not too long ago, the theory was that a Democratic sweep, which could bring higher corporate and personal tax rates and increased regulation, would be bad news for the market. Over the past month, the probability of a blue sweep (according to the online prediction markets) has jumped from about 47% to 60%. Now that such a sweep seems to be becoming a reality, the market is apparently turning its focus to the promise of a big fat stimulus package and a big fat infrastructure bill and seems to be far less concerned about the threat of increased taxes and regulation.
The stimulus bill and the election are the obvious targets that we all turn to in an effort to contrive excuses for the market’s actions. But we can’t lose sight of significant non-political forces at work. There’s still a lotta, lotta money on the sidelines, so there’s a lotta, lotta fuel for traders chasing any stocks displaying good upward momentum. Based on the way stocks have moved over the past few weeks, I think momentum buying has been a big factor in the market’s advance irrespective of the shifting political winds. That’s good while it lasts, but it’s also fair-weather buying. If the market currents reverse, those short-term momentum buyers are likely to head for the exits in a hurry.
SPX ended last week at 3477; it has climbed well clear of its 50-day moving average, which now lies about 100 points below. The old high is just a little over 100 points higher; with very little overhead resistance, new highs are within reach over the next few weeks coming into the election. But, if all the good news is already priced in, we’ll need to be prepared for the possibility of a post-election letdown.
This week, the economic report calendar increases in both the number of reports and in their significance. The new earnings season debuts this week with big banks and airlines in starring roles. Still, the most powerful catalysts for the market again this week are likely to come in the form of headlines on politics or the pandemic.
|Tuesday 10/13/2020||NFIB Small Business Optimism Index, September||100.2||100.9|
|Consumer Price Index, September, M/M||+0.4%||+0.2%|
|CPI ex-Food & Energy, September, M/M||+0.4%||+0.2%|
|Wednesday 10/14/2020||Producer Price Index, September, M/M||+0.3%||+0.2%|
|PPI ex-Food & Energy, September, M/M||+0.4%||+0.2%|
|Thursday 10/15/2020||Initial Jobless Claims||840K||833K|
|Philadelphia Fed Manufacturing Index, October||15.0||15.0|
|Empire State Manufacturing Index, October||17.0||15.0|
|Import & Export Prices, Imports, September, M/M||+0.9%||+0.3%|
|Import & Export Prices, Exports, September, M/M||+0.5%||+0.4%|
|Friday 10/16/2020||Retail Sales, September, M/M||+0.6%||+0.7%|
|Retail Sales ex-Vehicles & Gas, M/M||+0.7%||+0.4%|
|Industrial Production, Production, September, M/M||+0.4%||+0.6%|
|Industrial Production, Production, September, M/M||+1.0%||+0.8%|
|Business Inventories, August, M/M||+0.1%||+0.3%|
|Consumer Sentiment, October||80.4||80.6|
Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.