Under The Weather

Under the weather.  Stocks had a mixed close yesterday, giving up earlier session gains, because the virus is still spreading. Earnings and election anxiety added to an already volatile market as France and Germany propose lockdowns to put down recent virus surges.

N O T E W O R T H Y

Don’t even.  I know it seems obvious to make this statement, but I must.  This is wacky, wacky week for stocks.  Let’s just attribute it all to a confluence of all sorts of factors, none of them being particularly comforting to stock investors. Stocks had gotten a bit frothy in late summer driven by animal spirits and TINA. TINA is an acronym for There Is No Alternative, and there really aren’t many.  Most developed countries have had similar economic struggles to the US. Foreign stocks have underperformed US stocks and interest rates are tamped down. In the US, rates are low and staying low, but still above zero. Still, stocks appeared to provide many with the best alternative as investors focused on the better economy that would come post-pandemic.  By early fall, cyclical and industrial stocks began to enjoy investor interest as many hoped that a recovery was just around the corner.  Elections were largely ignored… until late last week as investors began to take a closer look at who might win, by how much, and what the post-election government might mean for the markets.  The economy is recovering but the recovery has been slowing and in need of further stimulus.  Rising hopes of a near-term stimulus agreement helped to bolster equities a bit leading up to this week.  Those hopes were dashed yesterday when Mitch McConnell adjourned the Senate until after the elections.  Also rising were virus cases in certain parts of the US, namely the Midwest and previously unaffected rural areas. Europe too, has seen a steep rise in cases prompting both France and Germany to consider temporary, but measured lockdowns.  Now we’re getting to the bottom of things.  How are companies weathering the crisis? Enter Q3 earnings season, which is in full swing… THIS WEEK. Interestingly, earnings appear to be pretty good so far with many companies exceeding Wall Street estimates.  Further, many reporting companies have a positive forward outlook, but… investors don’t seem to be too enthused.  Many stocks which have handily beaten estimates have traded off following the announcements.  The good news, if you can call it that, is that there is no real pattern to the post-earnings selling, which means that investors are just a bit edgy and will likely return to the winners when volatility dies down a bit.  Speaking of volatility, the VIX volatility index has been on the rise, which I am sure is not surprising.  You might recall how I highlighted several weeks ago that the VIX futures contracts were in contango, which means future prices are higher than the spot price today.  For the VIX that means that investors believe that volatility will heat up in the future. Leading up to the elections, investors were preparing for bumpy roads, which explains the contango.  Some more cold comfort can be taken from the fact that the contracts are no longer in contango, meaning that investors believe that things will be less volatile next month, December, and January.  That doesn’t mean that things won’t be volatile, just less than current levels.  Going back to my opening statement of a wacky week for stocks.  I intentionally said stocks and not markets, that is because bonds seem to be telling a different story.  As highlighted in this note a number of times, longer maturity yields have been slowly climbing reflecting bond investors’ view that a recovery along with inflation may be nearing.  In the past several sessions where stocks have traded off, bonds have held their own.  Ten-year treasury yields have shaved off several basis points but still remain higher than they were in late summer, so bond investors remain optimistic.  Last night WHILE YOU SLEPT more lockdown news from Germany and France caused a further selloff in equity futures, which are now pointing to a lower open. Twitter, Facebook, and Alphabet CEO’s will testify on Capital Hill, the President will hold two rallies, a hurricane is bearing down on the gulf coast, and we will hear from at least one Fed official.  Dare I forget to remind you that we will be getting lots of earnings before the bell today.  This morning so far, the early results appear to be positive, but that means very little in a week like this.  Barring positive vaccine or stimulus news, expect the wackiness to continue.

THE MARKETS

Stocks closed mixed yesterday in what appeared to be the return of the virus trade where investors chose lockdown stocks over cyclicals in response to virus case spikes in Europe and parts of the US.  The S&P500 closed down by -0.30%, the Dow Jones Industrial Average fell by -0.80%, the Russell 2000 Index sold off by -0.92%, and the Nasdaq Composite Index advanced by +0.64%.  Bonds traded up and 10-year treasury yields slipped by -4 basis points to 0.76%.

NXT UP

– Retail Inventories (Sept) are expected to have risen by +0.5% compared to the prior month’s +0.4% advance.

– EIA Crude Oil Inventories (Oct 23) may have increased by +1.153 million barrels compared to last week’s 1.002 million barrel draw.

– This morning Owens Corning, Generac, Anthem, UPS, W R Grace, Bunge, Enterprise Products Partners, GE, Boston Scientific, Blackstone, ADP, and Masco beat estimates while Six Flags Entertainment and CME Group missed.  Still on deck before the bell is Ford and Norfolk Southern.  After the close, we will get results from Parsley Energy, O’Reilly Automotive, Sunnova Energy, United Rentals, PerkinElmer, Welltower, ServiceNow, Etsy, Pinterest, Annaly, Antero Resources, Western Digital, Gilead, Visa, eBay, KLA, Equinix, Teledoc Health, Spirit Airlines, and Grubhub.

daily chartbook 2020-10-28