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Capital Market Impact Weekly market commentary

Markets approach record highs amid continued uncertainty

OCT. 12, 2020

Thoughts

  • Equity markets look to continue with gains following last week’s best performance in three months for the S&P 500® Index, gaining nearly 4%. This brings the Index within 1% of a record high despite uncertainty surrounding coronavirus, additional stimulus and the outlook for November’s election. Investor sentiment and market momentum have seen a dramatic rebound following a sluggish September.
  • Markets continue to rally as the prospect for a Democrat sweep grows, suggesting that investors are increasingly comfortable with market prospects under Biden. A Democrat sweep is seen as the trigger for a large stimulus package. According to RealClearPolitics, Biden’s lead nationally has grown to 10 points among the average of polls, with a 5% lead in the battlegrounds. Betting odds show Biden’s chances of winning at 67%, the best of the campaign to date. Historically, markets have tended to prefer split leadership in D.C., as gridlock prevents dramatic policy shifts. The recent rally coincident with the rising prospect for a Democrat sweep is therefore surprising, though surprises are the norm in 2020.

News

  • Negotiations continue concerning a potential next round of stimulus, though both Democrats and Republicans dismissed the White House’s most-recent $1.8 trillion offer. House Speaker Pelosi said it lacks a strategic plan to address the coronavirus and was inadequate in funding for state and local governments. Senate Republicans objected that the deal is too expensive, though White House economic advisor Kudlow expressed confidence that they will ultimately approve.
  • Earnings season unofficially begins this week with a wave of reports by banks, and the current estimate is for a decline of 21% on a 4% drop in revenues. This is set to be the sixth negative quarter in the past seven quarters, with all 11 sectors expected to decline. While this would be the second-worst quarter since the financial crisis, it is an improvement from last-quarter’s -32%, and it is better than the -25% expected as of June 30. During the second quarter, 184 companies in the S&P 500 either withdrew or did not provide EPS guidance due to uncertainty around the coronavirus and the impact on the economy. This led analysts to embed conservative estimates that are now being revised higher. Earnings are currently expected to decline by roughly 10% in the fourth quarter before rebounding sharply and growing 25% next year.

What to Watch

  • Politics will continue to dominate the headlines, as confirmation hearings begin in the Senate for Amy Coney Barrett’s nomination to the Supreme Court. A flood of economic data awaits, including the NFIB Small Business Index and CPI on Tuesday, PPI on Wednesday, import/export data on Thursday and retail sales, industrial production and consumer sentiment on Friday.

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Disclaimers

  • This material is not a recommendation to buy, sell, hold or roll over any asset, adopt an investment strategy, retain a specific investment manager or use a particular account type. It does not take into account the specific investment objectives, tax and financial condition, or particular needs of any specific person. Investors should work with their financial professional to discuss their specific situation.

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