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Stocks Rise, Stimulus Uncertain |
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The Week on Wall Street
Stocks staged a powerful rally last week, riding a wave of optimism over the prospect of the passage of a new fiscal stimulus bill.
Stimulus Stalemate?
The anticipation of lawmakers passing a new round of economic stimulus was a decisive driver of market action all week.
A mid-week tweet by President Trump announcing that he was ending stimulus negotiations sent stocks lower. Losses were exacerbated by sharp declines in some mega-cap technology companies as details emerged from a House Judiciary subcommittee report on its investigation into their competitive practices.[iv]
Stocks quickly reversed direction, climbing after the President tweeted that he would sign a limited stimulus bill, but lawmakers appeared to reject a piecemeal approach.
Stocks consolidated on Friday, helped by continuing stimulus talks and new election polls that suggested that the risk of a contested outcome appeared to be fading.
Small Cap Rally
The outperformance of large cap stocks relative to small cap stocks has been both wide and persistent during the last ten years. Last week’s action in small cap stocks, as represented by the Russell 2000 Index, indicates that smaller companies may finally be making up some ground.[v]
Last week, the Russell 2000 Index rose 6.33%, outperforming the S&P 500 by 2.4%.[vi]
While this outperformance may be fleeting, a potential broadening of the stock market rally may be considered a healthy development.
Final Thoughts
This week begins the third-quarter earnings season, with companies from a variety of industry sectors reporting (see below). Early earnings reports start predominantly with the major banks, whose earnings results may provide insight into the general health of American consumers.
As is often the case, company guidance about the future earnings may be of greater interest to investors than past results.
[iv] CNBC.com, October 6, 2020
[v] The Wall Street Journal, October 8, 2020
[vi] The Wall Street Journal, October 9, 2020
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The Quarter in Brief
The summer brought an economic rebound and a continuation of the stock market rally that began in spring. In late September, the Federal Reserve Bank of Atlanta's GDPNow tracker estimated real Gross Domestic Product (GDP) growth of 32.0% for the third quarter. All three of the major Wall Street benchmarks advanced in Q3; the S&P 500 added nearly 8%, ending the quarter up about 4% for the year. Even so, U.S. equities slumped in September as traders worried that the stock market might be getting ahead of the economy.[4][5]
In Washington, the Federal Reserve altered its monetary policy stance and forecast low-interest rates for the near future. Hopes for another economic stimulus dimmed in Congress. On Main Street, the coronavirus pandemic remained top of mind, but improvements in hiring, consumer confidence, and retail sales were evident.
Entering the fourth quarter, analysts wondered how adroitly the financial markets might manage some unknowns: a potential uptick in COVID-19 cases in the fall, the pace of vaccine development, the outcome of the presidential election, and undetermined prospects for additional economic support of businesses and households.
The U.S. Economy
Many positive signals appeared in the quarter. Millions of Americans went to work again; monthly net job growth topped 1.7 million in July and 1.3 million a month later. Unemployment, which had hit 14.7% in April, fell from 10.2% in July to 8.4% in August, and the U-6 rate counting both underemployed and unemployed Americans declined from 16.5% to 14.2%.[6][7]
Consumer confidence, as measured by the Conference Board's monthly index, leaped to 101.8 in August from 86.3 in July. Households kept up their buying-retail sales were up year-over-year through August even though supplemental unemployment benefits expired at the end of July.[8]
Industries also grew, according to research from the Institute for Supply Management. When ISM's Monthly Purchasing Manager Index for the manufacturing and services sector surpasses 50, those sectors are judged by ISM to be expanding. ISM's services PMI was at 58.1 in July and 56.9 in August; its manufacturing index reached 54.2 in July (a month that saw a 6.4% rise in U.S. factory orders) and 56.0 in August.[9]
Home sales soared as summer began, and although that momentum tailed off, sales did not retreat. Residential resales were up 24.7% in July, and another 2.4% in August. New home buying increased 4.8% for August after a 14.7% July climb. Housing starts and building permits were both up 17.9% in the first month of the quarter, but then they both declined; permits dipped 0.9% and starts 5.1% in the eighth month of the year.[10]
For more than a century, the Federal Reserve has had two primary monetary policy objectives: to manage inflation and to guide the economy toward a state of maximum employment. Historically, managing inflation has come first. So, it made news on August 27 when Fed Chairman Jerome Powell announced that the central bank would "seek to achieve inflation that averages 2 percent over time," rather than proactively adjust short-term interest rates when inflation approaches that established target. In other words, it would tolerate a little more inflation than it had in the past as a trade-off for spurring the economy. The Fed kept the federal funds rate in the 0%-0.25% range in the quarter, and its September consensus interest rate forecast showed it expected no change for short-term interest rates through 2022.[11][12]
The Global Economy
As economies worldwide continued to labor under the coronavirus pandemic, the International Monetary Fund (IMF) and Organization for Economic Cooperation and Development (OECD) revised their estimates of global economic activity for 2020 and 2021. The IMF sees a 3.0% contraction for global Gross Domestic Product (GDP) this year, with the global economy growing 5.8% next year. The OECD estimates a 4.5% pullback for global GDP in 2020, and then a 5.0% rebound in 2021.[13]
The quarter ended with no agreement yet on a post-Brexit trade deal between the United Kingdom and the European Union, as the post-Brexit transition period ends December 31. Complicating matters, U.K. lawmakers introduced a bill that would disregard conditions for trade with Northern Ireland established as part of Brexit, which the E.U. has hotly protested. U.K. Prime Minister Boris Johnson wants both parties to reach a free trade agreement this month; Johnson is aiming for a pact without quotas or tariffs attached, similar to the arrangement the U.K. has with Canada.[14]
Looking at foreign stock exchanges, some significant quarterly gains stand out. South Korea's Kospi index rose 11.2% in three months; no other consequential overseas benchmark advanced double digits in Q3l. China's Shanghai Composite added 7.82%, Taiwan's TWII 7.70%, Argentina's Merval 4.69%, Japan's Nikkei 225 4.02%, and Germany's DAX 3.65%. On the other side of the ledger, Hong Kong's Hang Seng retreated 3.96%, and Spain's IBEX 35 dipped 7.12%. MSCI's EAFE index, which tracks large companies across developed countries in Europe and Asia, rose 4.90% in Q3.[15][16]
Looking Back, Looking Forward
Stocks powered through July and August, entering historic territory in mid-summer. In particular, August saw a powerful rally. The Nasdaq Composite climbed 9.59% in August, and the Dow Jones Industrial Average gained 7.57%, finishing with its best August since 1984. Advancing 7.01% to cap a 5-month winning streak, the S&P 500 had its best August since 1986. September got off to a good start, with a new record close for the S&P: 3,580.84.[17][18]
Then, reservations about the rally surfaced. Traders began to question the sustainability of the summer economic recovery, and whether a fall uptick in coronavirus infections might hurt business and consumer spending. The S&P ended September at 3,363.00, retreating 3.92% for the month. The Dow lost 2.28% in September to fall to 27,781.70, and the Nasdaq gave up 5.16%, declining to 11,167.51.[19][20]
The 10-year Treasury yield spent all of Q3 between 0.52% and 0.74%, reaching the top of that range in late August.[21]
Wall Street enters the fourth quarter with a bit of uncertainty. The November election results may produce any number of reactions. There are only educated guesses as to when coronavirus vaccines may appear, and how effective they may be. The first reading on 3rd-quarter Gross Domestic Product growth is on October 27, roughly one week before election day.
Federal Reserve officials expect low-interest rates and very little inflation through 2022. Sustained low-interest rates could drive more borrowing and business investment, and improve the outlook for the housing market.
[4] Federal Reserve Bank of Atlanta, September 25, 2020
[5] CNN Business, September 30, 2020
[6] Investing.com, September 30, 2020
[7] Forbes, September 16, 2020
[8] Investing.com, September 30, 2020
[9] Investing.com, September 30, 2020
[10] Investing.com, September 30, 2020
[11] Forbes, September 16, 2020
[12] New York Times, August 27, 2020
[13] Nasdaq.com, September 30, 2020
[14] Associated Press, September 29, 2020
[15] Barchart.com, September 30, 2020
[16] Wall Street Journal, September 30, 2020
[17] CNBC, August 31, 2020
[18] Business Insider, September 2, 2020
[19] CNBC, September 30, 2020
[20] Google Finance, September 30, 2020
[21] Treasury.gov, September 30, 2020
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Movie Review by Bob Blattel
If you’re starved for laughter and travel, I heartily recommend Waking Ned Devine (1998). Tullymore, a small town in Ireland, is thrown into chaos when residents learn that one of their own has won millions in the National Lottery.
This enjoyable and quirky comedy is one of my all-time favorites. With small town hijinks, roguish friendships, sweeping views of the Irish countryside, and a PG rating, it’s a win for all generations.
I particularly enjoy spending the evening in Tullymore—the friendships and community come to life in a way that seems utterly natural and authentic. And there’s nothing like the soundtrack, with its lilting Irish ballads, to fully transport you to Ireland.
The writer and director Kirk Jones once admitted that this was his favorite movie. I certainly agree!
Grab your popcorn and enjoy!
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Securities and Investment Advisory Services offered through Cutter & Company Brokerage, Inc., 15415 Clayton Road, Ballwin, Missouri 63011 * (636) 537-8770. Member FINRA, SIPC.
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