Commentary provided by John Packs, Senior Investment Officer, AIG Retirement Services
Weekly Market Performance Snapshot (Week ending October 16, 2020 & Year-to-Date)
- Dow Jones Industrial Average®: +0.0% / +0.5%
- S&P 500® Index: +0.2% / +7.8%
- NASDAQ Composite® Index: +0.8% / +30.1%
- Russell 2000® Index: -0.2% / -2.1%
- 10-year U.S. Treasury note yield on October 16, 2020: 0.743%
- Down 3.1 basis points from 0.774% on October 9, 2020
- Down 117.7 basis points from 1.92% on December 31, 2019
- Best-performing S&P 500 sector this week: Industrials, +1.0%
- Weakest-performing S&P 500 sector this week: Real Estate, -2.3%
Past performance is not a guarantee of future results.
Stimulus Talks Grind On as Earnings Season Begins
Stimulus talks showed little sign of progress through the week, despite concerning signals from the labor market. Fearing that a stimulus package probably won’t pass before the election, equity markets declined and the 10-year Treasury rallied, as investors sought safety in U.S. government bonds. Equities perked up on Friday after unexpectedly strong retail sales figures were released.
- The White House raised its stimulus offer to $1.8 trillion, still about $400 billion lower than House Democrats’ $2.2 trillion proposal. Senate majority leader Mitch McConnell said his chamber will vote the week of October 19 on a smaller stimulus bill.
- Election uncertainty is injecting volatility into stocks, as markets weigh how various outcomes would affect the prospects for additional stimulus and other economic policies.
- Banks kicked off the quarterly earnings season. Goldman Sachs and Morgan Stanley reported strong earnings helped by trading revenue. JPMorgan Chase posted better-than-expected revenue and profit, thanks to rising trading revenue and lower loan-loss reserves. Bank of America and Wells Fargo had their earnings crimped by low interest rates. The KBW Banking Index is up just 2.9% since June 1, compared to a 14% rise in the S&P 500.
- Shares of Fastly, a cloud software provider, fell more than 30% after the company lowered its projected quarterly revenue. One of the company’s largest customers is TikTok, whose future is up in the air because of U.S. government concerns about data privacy. Fastly’s performance is a reminder that while technology companies have largely provided an upside surprise during the pandemic, a downside surprise can precipitate rapid downward price movement.
New Unemployment Claims Rise, While Retail Sales Show Unexpected Strength
First-time claims for unemployment benefits rose to 898,000, the highest level since August. The latest retail sales report showed a gain of 1.9% in September, well above market expectations. The two numbers paint a mixed picture of a jobs recovery stuck in neutral, while consumers continue to spend. Retailers are trying to anticipate how consumers will adjust their holiday shopping habits this year.
- September’s retail sales gain reversed a trend of moderating gains the past two months. While sales at the outset of the recovery jumped 18.3% in May and 8.6% in June, July’s gain was just 0.9%, followed by 0.6% in August. Remember, consumer spending is estimated to account for 70% of U.S. economic activity.
- Retailers are preparing for the upcoming holiday shopping season. Amazon’s Prime Day was moved from its traditional July date to October 13 and 14 to take advantage of early holiday shopping. CNN reported that it was Amazon’s highest-grossing Prime Day yet, while Amazon touted a nearly 60% increase in sales for small- and medium-sized businesses using its marketplace.
- Walmart announced that it will expand its traditional Black Friday sales event into three promotions over the course of November. Each will begin online before moving into stores.
Virus Concerns Rise as Case Counts and Hospitalizations Grow
Markets grew concerned this week over rising coronavirus infections and COVID-19 hospitalizations in the U.S. and Europe. Some European governments are reimposing restrictions on public activity.
- COVID-19 hospitalizations in the U.S. have risen since the start of autumn, but remain below the levels seen in July. Case counts have also risen, as has the number of tests administered. The Wall Street Journal reports that the 7-day average of positive test rates in the U.S. has risen over the past three weeks from 4.6% to 4.7% to 5.1%.
- France declared a public health emergency in Paris and other large cities. The UK and Germany have also taken action.
- A top World Health Organization official said that full lockdowns on public activity should be “a very, very last resort.” Instead, governments should take more targeted measures. “We know much better than in March what can, and needs, to be done,” the official said.
- Two major pharmaceutical efforts hit a snag this week. Eli Lilly paused its trial of a potential antibody treatment because of a safety concern, and Johnson & Johnson paused its late-stage vaccine trial following an unexplained illness in a participant. The details of each case are not clear and the trials may be resumed. Some experts cited the pauses as evidence that safety protocols are being adhered to even as companies race to find vaccines and treatments.
- Pfizer announced that it could have preliminary safety and efficacy data on its vaccine candidate in November. At that point, it could request emergency use authorization from the Food and Drug Administration. If approved, the vaccine could be in use by year end.
- A Yahoo! News/YouGov poll found that only 16% of Americans would get a COVID-19 vaccine as soon as it’s available, 46% would wait to see how it affects others, and 26% would never get vaccinated. The speed with which people get vaccinated could significantly affect future economic growth.
Final Thoughts for Investors
- This week’s earnings reports serve as a reminder that banks and other value stocks are highly dependent on the continuation and pace of economic recovery. Markets are eager for policymakers to agree on another round of fiscal stimulus, but stimulus is not a guarantee of future economic strength. When reviewing your portfolio with a financial professional, consider how your investments are positioned to perform through a variety of economic conditions.