The S&P 500 posted a 1.5% gain on the week, halting a four-week slide. Building off last Friday’s intraday reversal, the market advanced on the back of renewed hope for more stimulus. Though a deal remains elusive, there is growing consensus that a robust package is necessary. Economic momentum is slowing, virus trends are worsening in Europe, and the President is on his heels after a tough week. House Democrats and Senate Republicans have been going back and forth all week, but much as it did in March, necessity might force them to the table. Republicans are pushing for reduced aid to states and localities and a smaller unemployment benefit. However, the President may ultimately force their hand. Getting a check to Americans 4 weeks ahead of the election has to be front of mind for Trump. We believe it is tough to be too bearish on the market with this notion out there.
There have been a number of regional flare-ups in the U.S. recently, but overall trends in the virus have still been improving. This may not last for long if Europe is any indication. Case numbers continue to spike across the pond as temperature change sets in. Virus trends aside, there is no doubt that the economic recovery has been stalling out. After a sharp rebound in employment off of the lows, the pace of growth has tailed off. This is likely attributable to a growing number of permanent job losses as furloughs turn to layoffs. In addition, a number of layoffs from large employers have recently been announced. Friday’s jobs report also disappointed relative to expectations. It showed that jobs are coming back but at a slower pace. This is troublesome because personal incomes are starting to fall from stimulus boosted levels, and consumers are beginning to draw down on their savings. Another deal is most certainly necessary. Bad news may be good news if it ultimately leads to more stimulus.
It was a rough week for the President following a wild debate performance and his COVID-19 diagnosis. Betting odds moved heavily in favor of Biden late in the week, and stocks leveraged to a Trump victory underperformed significantly. However, we still haven’t seen overwhelming evidence from the market that a sweep is coming. We are closely watching the relative performance of a basket of high tax companies and a basket of low tax companies for cues. Right now, they are calling 50/50 odds on a Dem sweep, which is far lower than polls or betting odds would suggest. We continue to believe that the fate of Congress will be the most meaningful variable for the market over the short-term.
We also want to reiterate that companies seem to be weathering the environment quite well despite the volatility we may see over the coming weeks/months. Forward earnings projections are moving higher, and upward earnings revisions are surging on the company level. Companies are not the market and are not the economy. The best companies have been through many difficult environments before and adapted as necessary. We continue to believe they will do so going forward. Q3 earnings are just a few weeks away, and we should know a lot more after.
Preston May, CBE®
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