S&P 500 falls as surge in Covid-19 cases outweighs positive vaccine news

The stock market goes up or down, and you can’t adjust your portfolio based on the whims of the market, so you have to have a strategy in a position and stay true to that strategy and not pay attention to noise that could surround any particular investment. – John Paulson

Both the S&P 500 Index and the Dow Jones Industrial Average fell modestly last week as there was a surge in coronavirus cases and a dramatic rise in hospitalizations with many cities and states imposing new restrictions on businesses. The technology-heavy Nasdaq Composite Index edged slightly higher as investors rotated back to stocks that benefit from shelter-in-place rules while the Russell 2000 Index of small cap stocks soared 2.4%. The spike in infections was so bad that New York City halted in-person learning in schools and a JP Morgan economist forecasted that the economy would contract in the first quarter of 2021. An increase in restrictions and lockdowns due to the coronavirus could hamper economic growth and negatively affect earnings. Although the spread of new Covid-19 cases was troubling, there was positive news last week with regard to vaccines. Moderna said that its coronavirus vaccine was more than 94% effective in its late-stage trial and Pfizer released its final data on its vaccine candidate with BioNTech that showed it was 95% effective in preventing Covid-19. Both companies also announced that they would apply for emergency use authorization for their vaccine from the Food and Drug Administration (FDA). The good news wasn’t confined to the U.S., either, as the University of Oxford and AstraZeneca said that their vaccine candidate was also safe and effective against the virus. Third quarter earnings were also a positive surprise last week as retail heavyweights Home Depot, Walmart and Target all beat analysts’ estimates and offered favorable guidance. While negotiations are scheduled to resume again on a new fiscal stimulus package, it’s unlikely one will be passed before the end of the year. In the meantime, the market will probably be in a tug of war between optimism for a vaccine on the one hand and rising Covid-19 cases on the other hand.

Last Week

Retail sales in October rose modestly and were less than expected and could slow further as coronavirus infections surge and unemployed workers lose government financial support. October leading economic indicators increased moderately but growth is likely to slow as Covid-19 cases rise and cities and states impose restrictions. Housing starts in October were higher than forecast due to record-low mortgage rates and a desire on the part of homebuyers to relocate to larger homes in suburbs that provide more spacious workplaces. Existing homes sales in October were also better than expected and should continue to grow with a vaccine on the horizon. Sales would have been even higher had there been a greater supply of homes for sale as strong demand is driving up prices. Weekly jobless claims rose to 742,000, higher than expected and the first increase in a month.

It was announced that Tesla would be added to the S&P 500 Index on December 21^st while Amazon launched a pharmacy business that allows free delivery of drugs for its Prime members.

For the week, the Dow Jones Industrial Average dropped 0.7% to 29,263 while the S&P 500 Index declined 0.8% to close at 3,557. The Nasdaq Composite Index rose 0.2% to close at 11,854.

This Week

Durable goods orders for October are expected to increase modestly and be less than in September while new home sales in October are forecast to be strong with numbers near their best levels since the financial crisis. The second estimate of third quarter GDP is expected to show annualized growth of 33.1%, a record high.

The Federal Open Market Committee (FOMC) releases minutes from its November monetary policy meeting. The stock and bond markets will be closed on Thursday for Thanksgiving and both markets will close early on Friday.

Among the most notable companies scheduled to report third quarter earnings are Agilent Technologies, Dell Technology, HP, Analog Devices, Autodesk, Best Buy, Dick’s Sporting Goods, Gap, Nordstrom, Dollar Tree, J.M. Smucker, Deere and Medtronic.

Portfolio Strategy

With third quarter earnings season winding down and a paucity of potential market-moving economic data this week, the focus for the market will be on the growing virus outbreak and the timing of a vaccine distribution next year. Black Friday marks the unofficial start of the holiday shopping season and the disturbing increase in the number of Covid-19 cases could affect consumer spending and the economy as a whole. Unemployment benefits are set to expire for some 12 million people at the end of December and it is unlikely that another economic relief package will be passed by then. For these reasons, the labor market is expected to weaken and, as a result, the economy could contract in the first quarter with GDP falling about 1%. The stock market will probably react to the tug of war between rising coronavirus case counts and the promise of a vaccine in the near future, with positive news benefiting cyclical sectors such as industrials, financials and materials and negative news helping stay-at-home sectors such as technology. While there is definitely concern over the near-term that restrictions imposed on businesses by states and cities could adversely affect the economy, there is light at the end of the tunnel in the form of widespread vaccine distribution sometime next year and the strong possibility of additional stimulus. These positive developments should bode well for the economy and the markets longer-term.