ND&S Weekly Commentary 10.19.20 – Markets Mostly Higher on Hopes of Stimulus

October 19, 2020

Stocks moved slightly higher last week as investors focused, yet again, on hopes of another stimulus package and optimism over 3rd quarter earnings. Talks between the White House and Congress continued last week with both sides expressing optimism about a new round of stimulus, yet politics continue to weigh heavily on the process as the finger pointing continues. With the election just two weeks away it seems unlikely that a deal will get done before then.

For the week, the DJIA closed higher by 0.07% while the S&P 500 gained 0.21%. The Nasdaq closed higher by 0.79%. Small company stocks, represented by the Russell 2000, bucked the trend and gave back some ground as the index closed lower by 0.22% for the week. International stocks were mixed. For the week, the MSCI EAFE index lost 1.45% while emerging market equities (MSCI EM) tacked-on 0.15%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished the week higher by 0.24%. As a result, the 10 YR US Treasury closed at a yield of 0.76% (down ~3 bps from the previous week’s closing yield of ~0.79%). Gold prices closed at $1,900.80/oz. – down 0.97% on the week. Oil prices moved higher as oil closed at $40.88 – up 0.69% on the week.

Economic news released last week was mixed. On Tuesday, the U.S. Bureau of Labor Statistics reported that the Consumer Price Index (CPI) advanced 0.2% in September, matching expectations. Core CPI, which excludes food and energy, also gained 0.2% (in-line with expectations). On Wednesday, the U.S. Bureau of Labor Statistics reported that the Producer Price Index (PPI) gained 0.4% in September, ahead of expectations for a 0.2% advance. On Thursday, the Department of Labor reported that initial jobless claims for the week ending October 10 were 898,000, outpacing expected claims of 830,000. On Friday, the Federal Reserve announced that September’s industrial production fell 0.6%, missing expectations for a 0.5% decrease. Total industrial production is down 7.3% from the same time last year. In the week ahead look for news on housing starts, weekly jobless claims, existing home sales and Markit PMI.

Third quarter earnings season for the S&P 500 is off to a good start. With only 13% of S&P 500 companies reporting thus far, the largest twelve companies that have already reported have beaten estimates by over 20%. We see third quarter earnings as supportive of further gains in the market. However, offsetting earnings optimism will likely be spikes in Covid-19 around the world and continued bickering in Washington.

Expect increased volatility in the weeks ahead. The upcoming election will keep investors and markets on edge. We urge investors not to overthink the current wall of worry and to stick close to long-term target asset allocations with a slight defensive bias.

‘The will to succeed is important, but what’s more important is the will to prepare.” – Bobby Knight