Market Commentary for the week ending October 30th, 2020
- U.S. Gross Domestic Product (GDP) surged in Q3 but remains below pre-pandemic levels.
- More than half of companies have reported quarterly earnings with numbers continuing to top expectations.
- Technology stocks were among the worst performers this week.
The longer-term performance of the stock market has historically proven immune to the who controls the white house and congress. Investors with a strong affiliation to either party sometimes fear how control by the opposing party could impact performance but statistics simply show otherwise.
The accompanying table, provided by State Street SPDR ETFs, shows the performance of the S&P 500, a broad measure of the U.S. stock market, under various scenarios of government control. For example, the first scenario “Unified Government”, in the top line, is when the white house and congress are both controlled by the same party. This has occurred in 42 of the past 86 years and the market produced an average annual gain of +10.03%. The best scenario is having a split congress and a Democrat in the white house delivering a +13.60% average annual gain but this scenario only occurred in 4 years since 1933.
Source: SPDR ETFs 2020 Election Chart Pack
Predicting the short-term performance of the stock market is simply impossible. Some investors fret about the uncertainty today due to the election, COVID-19, and more and choose to sit on the sidelines with their investments. I believe this is simply shortsighted. Markets are always facing uncertainties and most often ones we never contemplate such as a pandemic that was nowhere at any time on most investors’ radar. I argue that there is far more certainty today regarding the pandemic given the fact that we know we are in one, something we could not begin to imagine a year ago.
Some investors will look at the above table and simply say “this time is different” and none of this history matters. Maybe. But given that the market has produced strong gains in every political scenario over 86 years…those are odds I’m willing to take.
Elon Musk, the founder and CEO of the popular electric car company Tesla (TSLA) received incentive compensation, part of his long-term agreement, valued at $11.8 billion in October. This compensation combined with Tesla’s stock up +368% year-to-date gives him a net worth of approximately $100 billion.
The pandemic has impacted our lives in a variety of ways including spending less time behind the wheel of our car. According to the Federal Highway Administration, the total number of vehicle miles traveled in August, the most recent month available, was down -12.3% compared to the same month in 2019. The accompanying graph shows the sharp drop earlier in the pandemic and following recovery. Separately the U.S. Department of Transportation shows similar trends.
This Week’s Performance Highlights
Stock prices worldwide, along with everything else, fell in the most recent week as concerns about rising COVID-19 cases weigh on investors. Also contributing to the declines were comments from various companies that fourth quarter results may not be as good as Wall Street has been forecasting.
- Large U.S. stocks closed the week down -5.6%, as measured by the S&P 500, but held onto a small year-to-date gain of +2.9%. It was a widespread selloff with 476 of the 500 stocks in the S&P, or more than 95%, were down for the week while only 24 posted gains. The NASDAQ Composite was down -5.5% and the Dow Industrials dropped -6.5%.
- Small U.S. stocks did no better losing -6.1% and down by a similar amount for the year.
Every sector fell although more conservative stocks such as telecom, utilities, and consumer stables posted the smallest losses. Technology stocks were among the biggest losers down -6.4% impacted by declines in some of the biggest names as illustrated in the accompanying table. This downward pressure may have been partially due to the heated questioning the CEOs of Facebook, Google, and Twitter faced in a Senate hearing.
- International stocks did little better with developed markets off an average of -5.5%. The decline though across regions was significantly different with Eurozone markets plunging -8.4%, fueled by big losses in Germany and Italy, while Japanese stocks slipped just -1.8%.
- Emerging markets held up the best but still fell -3.5% helped by a relatively strong market in China only down -2.3% for the week. Others did not fair as well such as Turkey and Russia down -11.2% and -9.3% respectively.
- Real estate stocks followed everything else lower for the week down adding to their year’s sizeable loss down another -5.3% for the week. Commodities also added to their 2020 loss giving up -5.0% for the week while gold held up the best slipping just -1.4%.
- Bond prices were down just fractionally losing -0.1% and now holding the title for the best 2020 performing asset class up +6.3% year-to-date.
Gross Domestic Product (GDP) soared in the third quarter with the headline number showing a gain of +33.1%, inline with expectations, after collapsing in the second quarter. The headline number can be a bit misleading as it is an annualized rate. The below graph provides, I think, a better perspective showing GDP in the second quarter, the low point since the pandemic’s start, down just -10.2% from the 2019 year-end high and the current quarter now down just -2.7% from that high.
The third quarter’s big comeback was helped a great deal by trillions of dollars of government stimulus provided to families and businesses hit by the pandemic. Consumer spending, businesses investing in new equipment, and a buildup in inventories were big contributors to the strong overall quarter while the trade deficit was a drag due to a big jump in exports than imports.
Although the quarter was strong, many fear that momentum has slowed due to a resurgence of COVID-19 cases and the lack of continued economic stimulus.
Durable Goods Orders, orders for items lasting longer than a year, increased for the fifth consecutive month up another +1.9% in September. The strong showing for the industrial sector helped this number come in meaningfully better than economists’ forecast of a decline of -0.2%.
Jobless Claims continued their downward trend with initial claims at 751,000 for the most recent week compared to 791,000 the week before. Continuing claims, or the total number of people receiving ongoing benefits, also fell but some expect this positive trend will stall in the coming month.
Although Consumer Spending continued to increase, up a better-then-expected +1.4% in September, Consumer Confidence registered a very small decline in the most recent month due to increased concerns about their future. Increased purchases of cars, trucks, and fall clothing combined with spending on medical and dental services fueled the overall increase. Consumer spending is now just -2% below pre-pandemic levels.
Housing prices continued their ascent according to the Case-Shiller Home Price Index up +5.7% nationally compared to the same period last year. Increased demand due to the pandemic and extremely low interest rates are driving prices higher.
Upcoming Economic Reports
- Employment Report
- Jobless Claims
- ISM Manufacturing Index
- Factory Orders