Unplugged. Stocks fell on Friday, marking a third week of losses for equities. Technology stocks continue to pull the indexes down as funds flow into value shares.
N O T E W O R T H Y
No tech, no cry. Who hasn’t noticed that the stock market has not exactly been a barrel of fun over the past few weeks. Barring a few exciting IPOs which remained out of the reach of most investors, prices of stocks have been under noticeable pressure. The stock market is at a very critical inflection point. From a macro perspective, there remain many cross-currents. The US economy continues to claw its way back from the depths achieved in the wake of the national lockdown in the first half of the year. Many believe that the bounce, which caused even the conservative Fed economists to upgrade their 2020 GDP projections, was principally driven by the Fed’ s super-dovish activity along with the trillions of dollars in Federal stimulus provided by the CARES Act. The Fed acknowledged that business investment as well as consumer spending have both experienced increases. Then there is the very practical fact that businesses have begun to reopen, offering at least some furloughed employees a chance to get back to their jobs. Similarly the re-openings have given cabin-fevered consumers a chance to spread their wings… dining in parking lots and roadsides around the nation. Then there are the not-so-often-heralded advances that have been made in the treatment of COVID. Death rates as a result of the disease have gone down as doctors get more experience in treating the disease with updated protocols and cocktails of existing medications. This has further emboldened many to venture out once again… and spend money… which is good for the economy. On the vaccine front, though it is hard to separate the political grandstanding from the actual facts, even a worst case scenario has vaccine availability within the next six months, which is encouraging. Also encouraging are the many signs that the late-stage vaccine trials are progressing positively. Those are the positive principal drivers, but there are detractors as well. As we get closer to the election, politicians are doing a good job at sewing uncertainty around the election process. That may serve their political aspirations, but the uncertainty is beginning to weigh on the markets. One can list many reasons for a market rally or pullback based on either party’s triumph, but the real issue facing markets at this point is a close-call result that may be subject to scrutiny. Remember, markets don’t like uncertainty and a contested election result could mean the ultimate uncertainty for stocks. Remember hanging chads? Markets didn’t like those. Also weighing down on the markets is the lack of Congressional action on additional stimulus. It is clear that the funding from the first stimulus had a positive impact on the turn-around, but a lack of further funding for the still massive number of unemployed, shell shocked local governments, and heavily affected sectors, could slow down the rate of the recovery. The unfortunate death of Justice Ruth Bader Ginsburg this past Friday threatens to further destabilize law makers’ progress as the highly politicized selection of a new justice takes center stage. On Friday, stock markets closed down, punctuating the third straight week of losses. The S&P500 quietly slipped below its 50-day moving average, catching the eye of technical analysts. Friday’s close marks the index’s first close below the trend line since April. A close below a moving average is viewed as a negative signal, indicating the potential for further declines. You can read more about moving averages in my note on the topic here: https://www.siebert.com/blog/index.php/2018/10/24/anything-goes/. Does it mean that the rally is over? Not necessarily. I have written a great deal on technology’s uneven influence on stock indexes. Both the S&P500 and the Nasdaq are dominated by mega-cap technology companies. The Dow Jones Industrial average too, is subject to the movements of a few technology stocks, though Apple’s recent share split has weakened the dependency somewhat. Technology stocks, therefore, had a heavy hand in helping to propel the S&P and Nasdaq back into the black and beyond for the year to date. In recent weeks, there has been a noticeable rotation out of technology stocks into sectors that would benefit from an economic recovery. Namely, cyclical sectors such as materials and industrials. Further there has been a notable increase in appetite for value stocks in favor of growth stocks. The move is not altogether clear and it has been veiled by the growing number of speculative retail traders who favor the volatile shares and options of technology and growth stocks. A massive quadruple witching day last Friday served to further obscure market direction last week. If in fact the rotation into cyclical sectors and from growth style into value persists, it is a sign that investors expect the economy to be on a path to recovery. We do have to remember however, that growth stocks too, do well in an expanding economy. But for now, investors who have remained steadfast and diversified will continue to gain cold comfort as the battles between red, blue, growth, and value rage on.
THE MARKETS
Stocks sold off on Friday as investors discouraged about spikes in COVID begin to pop up across once-thought-to-be-cured Europe. The S&P500 dropped by -1.12%, the Dow Jones Industrial Average sold off by -0.88%, the Russell 2000 slipped by -0.38%, and the Nasdaq Composite Index fell by -1.07%. Bonds slipped and 10-year treasury yields climbed by +1 basis point to -0.69%.
NXT UP
– Chicago Fed National Activity Index (Aug) may have increased slightly to 1.19 from 1.18.
– Fed Governor Lael Brainard will speak today.
– In the week ahead we will get a few, but notable earnings releases along with regional Fed reports, housing numbers, Manufacturing/Services flash PMIs, and Durable Goods Orders. Please refer to the attached economic and earnings calendars for details.
IMPORTANT DISCLOSURES.
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