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S&P 500 closes slightly higher despite surge in Covid-19 cases

When things are going well and prices are high, investors rush to buy, forgetting all prudence. Then, when there’s chaos all around and assets are on the bargain counter, they lose all willingness to bear risk and rush to sell. And it will ever be so. – Howard Marks

The stock market was able to overcome negative news reports on the coronavirus and close modestly higher last week, marking the third consecutive week of gains for the major averages. The S&P 500 Index and the Dow Jones Industrial Average increased slightly while the Nasdaq Composite Index was the clear winner with a gain of nearly 1%. Although it was the official start of third quarter earnings season, the bigger story might have been an increase in the number of Covid-19 cases both in the U.S. and Europe, where France declared a public health state of emergency and the United Kingdom was nearing a second national lockdown. There was also disappointing news with regard to the development of a vaccine and possible treatments for the virus. Drug manufacturer Johnson & Johnson, which reported strong quarterly earnings and raised its full-year guidance last week, paused its coronavirus vaccine trial after a participant reported an illness. Eli Lilly also was forced to pause its trial of a coronavirus antibody treatment for safety reasons. Talks continued between Treasury Secretary Steven Mnuchin and House Speaker Nancy Pelosi over passage of another economic relief package but both sides remained far apart on certain key issues. Pelosi was taking an all-or-nothing approach in proposing a staggering $2.4 trillion stimulus bill while the White House was advocating a more targeted approach with an offer of $1.8 trillion. With the presidential election less than three weeks away, a deal seems unlikely to occur by then. The first week of earnings season was dominated by the financials and, for the most part, the results were favorable. Money center banks JP Morgan Chase, Citigroup and Bank of America and investment banks Goldman Sachs and Morgan Stanley all beat analysts’ earnings estimates but the overall reaction to their stock prices was underwhelming. Bank and financial shares are considered value stocks that would benefit from a stronger economic recovery. The disturbing news last week about the increase in Covid-19 cases and the pause in vaccine and treatment trials may have caused investors to rotate back into technology stocks which are less sensitive to the economy.

Last Week

Retail sales in September were much better than expected, which bodes well for the economy as consumer spending accounts for roughly two-thirds of economic activity. Both the producer price index (PPI) and the consumer price index (CPI) in September rose modestly. In the 12 months through September, the CPI has risen only 1.4%. Weekly jobless claims were 898,000, much higher than expected, and the highest level since August 22nd. The University of Michigan consumer sentiment index for October rose to its highest level since March as consumers have become more optimistic about better economic conditions in the future.

For the week, the Dow Jones Industrial Average edged higher by 0.1% to 28,606 while the S&P 500 Index rose 0.2% to close at 3,483. The Nasdaq Composite Index gained 0.8% to close at 11,671.

This Week

Existing home sales in September are forecast to be higher than in August, which were at the highest level since late 2006, and housing starts are also expected to be slightly above those in August. Leading economic indicators for September are forecast to rise modestly but less than in the previous month.

The Federal Reserve releases its beige book, which summarizes the current economic conditions in the 12 Federal Reserve districts.

The most notable companies scheduled to report third quarter earnings this week are IBM, Netflix, Texas Instruments, Intel, Tesla, Lockheed Martin, Union Pacific, Whirlpool, Procter & Gamble, Coca Cola, Kimberly Clark, Travelers, American Express, Northern Trust, Abbott Labs, Southwest Airlines, Verizon and AT&T.

Portfolio Strategy

Despite mostly strong quarterly earnings from money center banks and investment banks last week, the results were largely ignored by investors as the stock prices of JP Morgan Chase, Citigroup and Bank of America all fell on the news. Strong trading results and reduced provisions for loan loss reserves enabled these banks to report better than expected earnings, but with interest rates near zero and expected to stay that way, net interest income will likely be under pressure. While financials dominated the earnings announcements last week, about 50 S&P 500 companies have reported their results so far and 86% of them have reported better than expected earnings. The reaction on Wall Street has been muted as the S&P 500 Index barely budged last week with only a slight gain. It could be that this earnings season will take a back seat to macro events that will affect the economy, namely the worrisome increase in the number of coronavirus cases nationwide and the lack of another economic relief package. The rate of new daily cases in the U.S. is at its highest level since August and there is concern that this troubling trend could slow the economic recovery. Weekly jobless claims were much higher than forecast last week, an ominous sign that worsening jobs data may lie ahead. The clock is also ticking with regard to another stimulus bill being passed before the election with the odds increasing that a deal will not be done in time. If nothing else, the markets are likely to be volatile and choppy in the weeks ahead as investors navigate through these macro events as well as third quarter earnings season.