Equity markets managed their first gain in five weeks, as investors shrugged off potentially disruptive political news. The seasonally-weak month of September saw a 4% decline, but following the 60% bounce since March, it is not unexpected or unhealthy to have a period of consolidation as we await a catalyst. Markets are likely to remain is in a period of directionless volatility as we watch the tug-of-war between the liquidity-driven economic rebound and the nervousness around the rebound in cases. The fourth quarter is the seasonally strongest of the year, averaging a 3.9% return since 1950, as markets look to break out to the upside.
For September, value indexes have outperformed growth, while small caps beat large caps, reversing the trend observed for much of the year. This shift is coincidental with an inflection in earnings estimates. The S&P 500 IndexTM is currently expected to grow earnings by 15% over the next 12 months, compared with 11% a month ago. By comparison, earnings have contracted by 13% over the past 12 months. Accelerating earnings could shift investor attention away from the steady growth large-cap growth space to the more economically-sensitive value and small cap spaces.
Companies are rapidly reformulating their balance sheets given the accommodating bond market and the headwinds from the choppy economy. We have seen more than $1.5 trillion in investment-grade and high-yield corporate debt through September, exceeding any previous year’s run rate by more than 50%. Some funds are being used to continue operating weak industries (cruise lines, hotels, airlines and many retailers), while others are viewing it as an opportunistic move to enable dividends, share buybacks, acquisitions and new spending. Despite the heavy issuance, low interest rates and tight credit spreads allow borrowing at near-record lows.
President Trump’s medical condition continues to improve after announcing that he tested positive for COVID-19 on Friday. The doctors announced that he could leave the hospital as early as Monday. The presidential election is less than a month away, with Biden’s national lead in the polls at 8%, the lead in battleground states at 4%, and betting markets showing Biden’s odds at 61%, up from 54% a week ago.
House Speaker Pelosi said on Sunday that lawmakers are “making progress” on another coronavirus relief bill after Trump called for swift action, but she did not offer any details after releasing a “Dear Colleague” letter that said while she is hopeful that an agreement can be reached, there is still significant disagreement in key areas such as unemployment, schools, and state and local funding, the Child Tax Credit and Earned Income Tax Credit, testing and tracing, and appropriations.
Nonfarm payrolls rose by a weaker-than-expected 661,000, with strength in the private sector offset by weakness in state and local governments. The unemployment rate surprised to the downside at 7.9% as the labor force participation rate fell. To date, roughly 12 million of the 22 million lost jobs have recovered. A notable trend shows a shift in the percentage of jobs that are permanently lost versus temporary, rising 345,000 to 3.8 million. Job losses are extending beyond industries directly impacted by the pandemic. Last week saw a wave of layoff announcements, including announcements by Shell, Disney, Coca-Cola, Allstate and Goldman Sachs.
What to Watch
A light week of data awaits, led by PMI data on Monday, JOLTS job openings and trade data Tuesday and consumer credit on Tuesday. Fed Chair Powell speaks on Tuesday, while the minutes from September’s FOMC meeting will be released on Wednesday. The vice-presidential debate is scheduled for Wednesday and takes on a new dynamic given the events from last week.
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