Hang In There

Hang in there.  Stocks closed lower yesterday as investors eyed rising infection rates and trepidation ahead of last night’s debate.  Consumer confidence ticked up, beating economists’ estimates, but still remained below pre-pandemic levels.

 

N O T E W O R T H Y

 

The song remains the same. Hello, it’s election season!  I suppose it is easy to have overlooked it in the past few months.  We are, after all, in the midst of a pandemic like none of us has likely witnessed in our lifetimes.  The economy is recovering slowly, but the recovery cannot mask the hardship felt by many who have been financially damaged, or worse physically.  Political rhetoric has made the election season that much more confusing, causing many to simply push mute, and dig in.  Unfortunately, you can’t just push mute on the stock market.  Many financial commentators have been lamenting that investors are not factoring in the looming election, but the fact is, they are.  I wrote about the VIX’s future curve a while back, and the short of it is that volatility is expected to increase and peak in November and recede in December.  This morning, the current VIX is at 26 and the October future is at 30, a condition known as contango.  It demonstrates that investors expect the underlying asset to be worth more in the future than today.  In commodities, it may occur if investors expect supply to decrease or demand to increase related to seasonal factors or upcoming policy changes.  In the case of the VIX, a higher future number means that investors are expecting higher volatility in the future.  You don’t need to be a mathematician or an economist to know that the election will cause some volatility in the stock markets, but it is nice, if not cold comforting, to know that market structure, itself, has already factored it in.  That said, we must still cover that ground and deal with the volatility that awaits us.

 

I do my very best to avoid talking about politics, but I must constantly be conscious of political impact on the markets.  I hear lots of chatter about which presidential candidate would be better for the stock market.  I won’t get into what the common theme is, but I am sure that you are thinking it right now. Interestingly, the facts don’t support what you are probably thinking.  There have been many studies done on that and the results show that unified governments (president and at least one chamber in the same party) under both parties historically yield the same stock market returns.  That is right, stocks have not historically been advantaged by either party’s dominance.  The real anomalies occur when the presidency is split with Congress.  In those years where a Republican was at the helm with a Democratic senate/house, markets significantly underperformed the years with a Democrat in the Whitehouse and a Republican senate/house.  That said, when it comes to markets, there are no guarantees that what happened in the past will occur in the future, but we can at least use it as a guide.  The polls are indicating a tight race in November, and the failure of the pollsters in the last election make many that much more skeptical of the current ones.  With that said, it is anyone’s guess about the outcome of the election at this point.  One thing we do know is that more volatility awaits us, starting with today. Last night, WHILE YOU SLEPT, stock futures initially rallied through the debate, but quickly fell in its aftermath.  Though many early reports are pointing to election uncertainty over a clear winner, a month and quarter end today can also inject more volatility into equity markets.  If we turn to history as a guide, a report published by LPL Research shows that 10-Day returns after the first presidential debate fell by -1.8% on average.  The median however, showed an increase of +0.8% with 66.7% of those periods yielding positive returns. Every day is a new day in the markets and this year, this month, this day, is no ordinary one.

 

THE MARKETS

 

Stocks posted moderate decreases yesterdays as increasing virus numbers riled markets and debates over the debate began to add discomfort. The S&P500 gave up -0.48%, the Dow Jones Industrial Average fell by -0.48%,  the Russell 2000 Index sold off by -0.37%, and the Nasdaq Composite Index slipped by -0.29%.  Bonds advanced and 10-year treasury yields slipped by -1 basis point to 0.64%.  The VIX index was unchanged in yesterday’s session, closing at 26.27.

 

NXT UP

 

– ADP Employment Change (Sept) is expected to show +649k new hires, up from last month’s 428k additions.

– The second estimate of Q2 GDP is expected to show a -31.7% decline, in line with the last estimate.

– Chicago PMI (Sept) may have increased to 52.0 from 51.2.

– Pending Home Sales (Aug) may have grown by +3.1%, down from July’s +5.9% advance.

– Today’s Fed speakers include Kashkari, Bowman, and Bullard.

 

 

daily chartbook 2020-09-30

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