It’s very difficult for any particular segment of the stock market to sustain superior performance. The watch word for our financial markets is, “reversion to the mean” i.e. what goes up must come down, and it’s true more often than you can imagine. – John Bogle
Last week’s stock market action could probably be best summed up by Murphy’s Law, an old adage that says that anything than can go wrong will go wrong. The market suffered its worst weekly performance since the onset of the pandemic in March and, as a result, also logged its worst monthly performance. The S&P 500 Index dropped 5.5% while the Dow Jones Industrial Average plunged 6.5%. It’s difficult to explain what spooked the market as the fundamentals in the form of third quarter earnings and economic data were overwhelmingly positive. The earnings focus last week was on the big technology stocks that have driven the market and, without exception, their results were better than expected. Microsoft, Facebook, Alphabet (Google), Amazon and Apple all beat expectations for both revenue and earnings. The fact that Apple did not offer guidance for its fiscal first quarter due to uncertainty regarding rising Covid-19 case counts was the only perceived negative. Nevertheless, all of these stocks sold off on Friday after reporting strong earnings the prior day. Concerns over the rapid increase in coronavirus infections and their potential impact on the global economy also affected investor sentiment. Covid-19 cases hit a record in the U.S. as average daily cases over the past week were over 70,000 and hospitalizations were up 5% or more in 36 states. Cases in Europe rose sharply, too, and leaders in France and Germany began locking down their economies again. While investors had been holding out hope for another stimulus package, those hopes were dashed when the Senate adjourned until November 9th. The White House had offered targeted, stand-alone bills related to airline payroll relief, small business loans and direct payments to individuals to at least provide some aid to those that are suffering, but House Majority Leader Nancy Pelosi decided to play politics and took an all-or-nothing approach. There were also indications that the polls were tightening considerably in the presidential election, prompting fears among investors that there could be no clear outcome. The market hates uncertainty, which is why many investors chose to go to the sidelines and wait until the smoke clears.
With few exceptions, economic data last week was positive and not indicative of the market’s reaction. Gross domestic product (GDP) rose at a 33.1% annual rate in the third quarter, better than expected, with stronger consumer spending along with solid gains in business spending and residential investment. Durable goods orders in September easily topped expectations and rose for the fifth straight month and core capital goods orders, a key measure of business investment, exceeded pre-pandemic levels for the second straight month. Weekly jobless claims were 751,000, less than expected, and down 40,000 from the previous week, as they fell to the lowest level during the pandemic. New home sales fell in September and were below forecasts but are still up substantially over last year. This drop may signal a slowdown in housing market momentum heading into the fourth quarter despite record low mortgage rates. Consumer confidence dipped slightly as consumers became less optimistic about the future.
For the week, the Dow Jones Industrial Average plunged 6.5% to 26,501 while the S&P 500 Index lost 5.6% to close at 3,270. The Nasdaq Composite Index dropped 5.5% to close at 10,911.
The October employment report released on Friday is expected to show that 650,000 new jobs were created and that the unemployment rate fell to 7.7% from 7.9%. Both the October ISM Manufacturing Purchasing Manager’s Index (PMI) and the ISM Services Sector PMI are forecast to be solidly in expansion territory and in line with September data.
The Federal Open Market Committee (FOMC) meets this week and will announce its monetary policy decision. Previously, it has said that the federal funds rate will likely remain near zero until at least 2023 to help bolster the economy.
The most notable companies scheduled to report third quarter earnings this week are Clorox, Sysco, Mariott International, Ingersoll-Rand, Emerson Electric, General Motors, Toyota Motor, Waste Management, MetLife, AIG, ViacomCBS, Qualcomm, Bristol Myers Squibb, CVS Health, McKesson, Cigna, Duke Energy and Dominion Energy.
While the spotlight will be on the presidential election this week, the Federal Open Market Committee (FOMC) meeting will also garner a lot of attention. Most economists expect the Fed to leave interest rates unchanged near zero and expect no other monetary policy moves at this time. However, fears of an economic slowdown due to rising Covid-19 cases across the country is creating a lot of uncertainty and could prompt additional action by the Federal Reserve. Despite a 33.1% annualized gain in third quarter gross domestic product (GDP), the addition of over 11 million jobs since May and a strong housing market, the benefits of the economic relief package have been exhausted and there could be no new stimulus until next year. The surge in coronavirus cases is worrisome as it could force many businesses to shut down. This prospect puts added pressure on the Federal Reserve to act now rather than wait until their meeting in December. Unfortunately, there isn’t much more that the Fed can do. Last week it announced that as part of its Main Street Lending Program for small and medium-sized businesses, it would reduce the minimum loan to $100,000 from $250,000. It could also increase the amount of Treasuries and mortgage-backed securities that it is buying each month from the current $120 billion or buy more long-dated securities as part of the mix. Rest assured, though, that Federal Reserve Chairman Jerome Powell will reiterate that the Fed stands ready to do whatever it takes to help support the economy.