Stocks surge on stimulus bill hopes, treatments for virus

The investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. – Benjamin Graham

The Dow Jones Industrial Average rose for the second consecutive week as investors remained hopeful that another economic relief bill would be passed and there were positive developments in the treatment of Covid-19. The S&P 500 Index and the Nasdaq Composite also posted healthy gains while the Russell 2000 Index of small cap stocks surged 6.4%. September was the stock market’s first negative month since March but October is off to a great start. While House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin continue to hammer out their differences, both sides remain far apart with the House proposing a $2.4 trillion package and the White House countering with a $1.8 trillion proposal. Even a standalone relief package to benefit the struggling airline industry was rejected by Pelosi. It’s becoming increasingly unlikely that a deal will be reached before the election despite the urging of Federal Reserve Chairman Jerome Powell, who once again reiterated the need for additional fiscal stimulus so the economic recovery can continue. Minutes from the September Federal Open Market Committee (FOMC) meeting revealed their concern as Fed officials discussed reviewing their current bond-buying program as a way to bolster the economy’s slowing recovery by purchasing more Treasuries and mortgage-backed securities. Fed members also expressed their concern over additional virus outbreaks and the possible harmful effects on the economy. But there was good news last week in the development of treatments for the coronavirus. Gilead Sciences’ drug, remdesivir, showed promising results in the treatment of the virus and Eli Lilly said that its coronavirus cocktail had begun Phase 2 trials. Regeneron Pharmaceuticals also reported success with its experimental treatment, which was given to President Trump and ostensibly enabled him to recover from the virus. While news on the virus and another stimulus bill will continue to drive the market, investors will also have to take into consideration third quarter corporate earnings as the reporting season begins in earnest this week.

Last Week

There was very little in the way of economic data last week. The Job Openings and Labor Turnover Survey (JOLTS) showed that there were 6.4 million job openings, slightly less than forecast. The U.S. trade deficit rose in August to $67.1 billion, the third widest gap in history as U.S. exporters struggle to make up lost ground in the early stages of the pandemic. Weekly jobless claims were 840,000, compared to expectations of 825,000.

For the week, the Dow Jones Industrial Average rose 3.3% to 28,586 while the S&P 500 Index jumped 3.8% to close at 3,477. The Nasdaq Composite Index surged 4.6% to close at 11,579.

This Week

Both the producer price index (PPI) and the consumer price index (CPI) for September are expected to increase modestly and confirm that inflation remains under control. Retail sales for September are forecast to rise nearly 1%, higher than in August. The preliminary October University of Michigan consumer sentiment index is expected to be slightly higher than it was in September.

Third quarter earnings season begins this week and financial firms and banks will dominate the early going. Among the most notable of these companies are JP Morgan Chase, Citigroup, Wells Fargo, Bank of America, Goldman Sachs, Morgan Stanley, Blackrock, PNC Financial, U.S. Bancorp and Charles Schwab. Other prominent companies scheduled to report include Johnson & Johnson, UnitedHealth Group, Walgreens Boots Alliance, Schlumberger and Delta Air Lines.

Portfolio Strategy

Although over 20 S&P 500 companies have already reported third quarter earnings, the unofficial start to earnings season begins this week with JP Morgan Chase on Tuesday. So far the early results from this small sample size have been encouraging as over 90% of these companies have beaten analysts’ estimates. Not only are companies beating forecasted earnings but they are doing it by a wide margin. Another good sign is that the same percentage of companies have also exceeded revenue expectations. While corporate earnings are expected to fall over 20% from the same quarter a year ago, analysts have actually been revising their earnings estimates higher recently. What has made their job difficult is the fact that corporations have been unable to provide any reliable guidance due to the tremendous amount of uncertainty associated with the coronavirus and its effect on the economy and corporate profits. But early earnings results give investors hope that the economy is improving and that the worst of the coronavirus-induced shutdown is over, which should bode well for sales and profits. That is not to say that the stock market won’t be affected by the path of Covid-19 and the uncertainty it is sure to cause in the coming months. Other concerns such as another economic relief package, Federal Reserve policy, the upcoming election, trade with China and the extent of the economy reopening will also have an effect on the direction of the stock market. Ultimately, though, earnings are what drive stock prices and investors will have an opportunity to focus on these fundamentals over the next several weeks.