Weekly Investment Newsletter (SITREP) – October 26, 2020

The first half of October was strong for stock market returns, however U.S. markets dropped modestly last week given the rising uncertainty around U.S. elections. Daily market returns seemed to fluctuate greatly around the news cycle depending on the outcome of corporate earnings announcements and political updates. These two have created crosscurrents for the markets on a short-term basis as economic recovery and improved earnings results are meeting concerns over political outcomes. It is hard for us to believe that the weakness in markets is the result of anything other than election uncertainty.

 

The major U.S. benchmarks ended the week mixed as investors reacted to stimulus negotiations and third-quarter corporate earnings reports.  The technology-heavy NASDAQ Composite performed the worst, dragged lower by weakness in bellwether Apple, while the mid cap S&P 400 and small cap Russell 2000 paced the field with modest gains.  The Dow Jones Industrial Average finished the week down 271 points to 28,336—a decline of -0.9%.  The NASDAQ Composite, the worst of the lot, finished down -1.1%.  By market cap, the S&P 500 gave up -0.5%, while the S&P 400 and Russell 2000 rose 0.9% and 0.4%, respectively.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 10/26/20

 

The banter around U.S. politics over the past week has pushed markets into greater uncertainty. While major social media and news (can you still call it that?) outlets have wandered significantly beyond the norms of censorship, investors have decided to reduce their risk appetites in the stocks that have done the best this year. Technology, consumer discretionary and staples stocks dragged the index down last week despite encouraging earnings results. Financial stocks surged last week on better than expected earnings results for the major banks.

Source: J.P. Morgan Asset Management, Weekly Market Recap, 10/26/20

 

Our short-term market indicator has weakened nominally in the last week and is closer to turning negative. The longer-term indicators remain constructive as investors continue to show favor for U.S. stocks over international stocks. The latest asset class review reflects strength in large cap growth and large cap blend categories while midcap growth remains in a favorable position. Small cap growth stocks have done well in recent weeks but continue to reflect heightened risk levels. You can learn more about our market indicators by watching our monthly “Portfolio Construction” webinar (link here).

 

The headlines continue to highlight concerns over rising COVID cases as more testing has become available. Recall that a surge was forecast by most governments in the fall as the weather turned cooler. Health authorities remind us that the increase in positive cases correlates highly to the increase in testing made available. The overall death rate from COVID has fallen precipitously revealing better treatment options for those infected. The S&P 500 has remained above the 50-day moving average. Both the 50-day and 200-day moving averages remain positively sloped indicating a rising trend. The current technical pattern is encouraging for the index if we can bottom in the coming days and resume the rising prices we saw earlier in the month.1

Source: Bespoke Investment Group, The Bespoke Report, 10/23/20

 

More companies will release earnings this week and the results so far are very encouraging. Currently, 84% of companies reporting earnings are beating the estimate provided by analysts which is tied for the best quarter since 2008. Earnings results are more than 17% above the estimates which is well above the five-year average of only 5.6%.2 Even more impressive is that analysts had upgraded their estimates by nearly 18% going into earnings season showing that companies have done much better than expected during the COVID recovery. Overall S&P 500 earnings will still be down nearly 17% for the quarter, however, that is much lower than what was expected given the nature of the economic shutdown.3

Source: Bespoke Investment Group, The Bespoke Report, 10/23/20

 

One of our primary concerns going into October was that earnings estimates had risen substantially setting a high bar for expectations. According to Bespoke Investment Group, stocks normally beating their earnings estimates see stock price increases of 1.5% on the day after announcements. This quarter is seeing average price increases of 1.13% while companies providing earnings results below expectations are seeing stock prices fall dramatically.4 In fact, we have seen a number of companies delivering what Bespoke calls a “Triple Play”, a company who beats on earnings, revenues and provides higher guidance for next quarter. Unfortunately, the market has not been rewarding triple plays with higher stock prices as two-thirds of stocks with triple plays seeing their stock price fall during the next day.5

Source: Bespoke Investment Group, The Bespoke Report, 10/23/20

 

The U.S. economy continues to show signs of strong recovery from the COVID lows. This week has seen positive surprises for manufacturing and service readings (PMI & ISM). The outlook for business activity also came in at the highest level since April 2018. The housing sector continues to dominate all other economic readings showing strong sales of new and existing single-family homes. Inventory levels remain subdued as demand grows and permits for new construction run feverishly high. Although the government (NBER) has not declared the recession to be over, the index of leading economic indicators appears headed back to pre-recession levels.6

Source: Bespoke Investment Group, The Bespoke Report, 10/23/20

 

Interest rates continued their trend higher last week with the 30-year U.S. Treasury Bond crossing the 1.6% level while the 10-year U.S. Treasury Bond hit 0.85%. Interest rates in Europe and Asia rose nominally as well while the world continues to grapple with the increased bond offerings from major governments needed to provide for the massive stimulus being offered. Government auctions for longer-dated bonds continue to receive tepid demand.7

Source: J.P. Morgan Asset Management, Weekly Market Recap, 10/26/20

Source: Bespoke Investment Group, The Bespoke Report, 10/23/20

 

Global trade volumes remain muted by more than 3% since pre-COVID levels. The recent recovery has been extraordinarily strong as the demand for goods rebounds off the lows in April. Strong industrial production in many areas of the world, including the U.S. and China, help prove that consumers are in buying mode.8 The Federal Reserve has helped keep the U.S. dollar lower promoting easy conditions for emerging market countries in recovery mode. Investors have enjoyed fewer headlines regarding trade tensions during the last few months although recently announced European tariffs on various U.S. goods brought the ongoing struggles to mind again last week.

Source: Bespoke Investment Group, The Bespoke Report, 10/23/20

 

If you would like to schedule time to discuss our process in greater detail, please call our office at (281) 616-5935 or send an email to cameron.malott@engravewealth.com. We are continually grateful for the confidence you have placed in our team. We look forward to serving your family in the years to come!

Engrave Wealth Partners Investment Committee

Bill Day, CFP®, CIMA

Taylor Parker, CFP®

Greg Parker


Footnotes:

  1. Bespoke Investment Group, The Bespoke Report, 10/23/20
  2. Factset Insight, John Butters, 10/23/20
  3. Factset Insight, John Butters, 10/23/20
  4. Bespoke Investment Group, The Bespoke Report, 10/23/20
  5. Bespoke Investment Group, The Bespoke Report, 10/23/20
  6. Bespoke Investment Group, The Bespoke Report, 10/23/20
  7. Bespoke Investment Group, The Bespoke Report, 10/23/20
  8. Bespoke Investment Group, The Bespoke Report, 10/23/20
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