Equity markets fell for the first time in four weeks in reaction to rising coronavirus infections and stalled stimulus negotiations. Markets have shifted to a “risk-off” stance quickly, with weakness on Monday seen in Asia and Europe.
The complexion of market leadership took a notable shift last week, with pro-cyclical sectors (i.e. banks) strong, while technology lagged. This is partially due to the steepening of the yield curve to the widest level since early 2018, but also a reaction to the growing belief that while chances of a near-term deal have faded, a post-election stimulus deal will surprise to the upside. In 2020, the Russell 1000 Growth Index has gained 27%, while the Russell 1000 Value Index has lost 10%, creating the widest performance gap on record.
Coronavirus cases continue to accelerate across the northern hemisphere, with Spain and Italy imposing additional restrictions and Belgium and Poland hinting that measures are on the way. In the U.S., new cases reached 84,000 on Friday and Saturday, with 13 states hitting a record high. Hospitalizations are on the rise, causing many states to consider increased mitigation measures, though a widespread lockdown is unlikely.
Election day is a week away, polls continue to show Joe Biden with a healthy, though shrinking, lead. The RealClearPolitics average of polls has Biden with an 8% lead across the country and 4% in key battleground states. Betting markets show the odds of the Democratic Party winning the White House and Senate continue to be roughly 50%, down from 62% two weeks ago. Analysts predict that a Democratic sweep would result in a massive stimulus deal, increased regulations and higher taxes on corporations and high-income earners.
Economic activity continues to surprise to the upside in the U.S., with strong reports on PMI and existing home sales last week. The index of leading indicators rose 0.7% in September, slower than the 1.4% in August and 2.0% in July, suggesting the economy continues to grow, but at a slower pace. The index fell 4% from a year ago, the best result since February, but indicating we are far from the previous peak. Earnings season continued, with one-quarter of the S&P 500® companies having reported. Earnings are on pace to contract by 16%, better than the -25% expected on June 30. Health care and consumer staples have managed modest gains, while energy and industrials have been hardest hit.
What to Watch
This week will mark the end of October and is the last full week before the election while being the busiest week of earnings season. Economic data includes new home sales on Monday, durable goods and consumer confidence on Tuesday, third-quarter GDP and pending home sales on Thursday, and personal income and spending, PCE deflator and consumer sentiment on Friday.
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