The Week on Wall Street
Stocks staged a powerful rally last week, riding a wave of optimism over the prospect of the passage of a new fiscal stimulus bill.
The Dow Jones Industrial Average rose 3.27%, while the Standard & Poor’s 500 increased 3.84%. The Nasdaq Composite index gained 4.56% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, advanced 2.23%.
The anticipation of lawmakers passing a new round of economic stimulus was a decisive driver of market action all week.
A mid-week tweet by President Trump announcing that he was ending stimulus negotiations sent stocks lower. Losses were exacerbated by sharp declines in some mega-cap technology companies as details emerged from a House Judiciary subcommittee report on its investigation into their competitive practices. Stocks quickly reversed direction, climbing after the President tweeted that he would sign a limited stimulus bill, but lawmakers appeared to reject a piecemeal approach.
Stocks consolidated on Friday, helped by continuing stimulus talks and new election polls that suggested that the risk of a contested outcome appeared to be fading.
Small Cap Rally
The outperformance of large cap stocks relative to small cap stocks has been both wide and persistent during the last ten years. Last week’s action in small cap stocks, as represented by the Russell 2000 Index, indicates that smaller companies may finally be making up some ground. Last week, the Russell 2000 Index rose 6.33%, outperforming the S&P 500 by 2.4%.
While this outperformance may be fleeting, a potential broadening of the stock market rally may be considered a healthy development.
THIS WEEK: KEY ECONOMIC DATA
Tuesday: Consumer Price Index (CPI).
Thursday: Jobless Claims.
Friday: Industrial Production. Consumer Sentiment.
THIS WEEK: NOTABLE COMPANIES REPORTING EARNINGS
Tuesday: Johnson & Johnson (JNJ), J.P. Morgan Chase (JPM), Citigroup (C), Blackrock (BLK)
Wednesday: Bank of America (BAC), UnitedHealth Group (UNH)
Thursday: Morgan Stanley (MS)
Friday: Schlumberger (SLB), J.B. Hunt Transport Services (JBHT), Kansas City Southern (KSU), V.F. Corporation (VFC)
This week begins the third-quarter earnings season, with companies from a variety of industry sectors reporting. Early earnings reports start predominantly with the major banks, whose earnings results may provide insight into the general health of American consumers. As is often the case, company guidance about the future earnings may be of greater interest to investors than past results.
As suggested last week, markets appear to be finding their footing. In fact, with last week’s close above trend, the S&P 500 may be looking to re-take its all-time highs in the next week or two. The question is why?
Aren’t we staring at an election year? Odds makers have Biden winning. Isn’t that a vote for a massive (and expensive) tax overhaul that will stifle the markets?
Maybe… but not yet.
In the short term… as in, the next few days… markets are betting on more stimulus. After all, FREE money means we don’t have real economic problems to deal with (there is no sarcasm font so you’ll have to read between the lines on this comment.) IF they’re right, it’s short-term lighter fluid on the stock market.
A new round of stimulus probably bumps the markets to all-time highs, but the bump may be short-lived as the stimulus is sort of being baked into the prices already. Then we have to consider the ‘next’ thing the markets are going to think about, which is the possible tax fallout of a Biden win. The POTUS probably isn’t the biggest concern. The Senate is. If it flips blue, the checks and balances that exist in the system stand to flip too. Then, a lot more extreme jockeying can take place.
Political opinion aside, the blue side of the aisle is on record as being in favor of higher corporate and personal taxes. A significant tax hike on either group, at least so far, does not appear priced into the markets. New taxes = new headwinds… even in a market as resilient as this one.
Since investors are (rightfully) incapable of handicapping the outcome of the upcoming election, time horizons have shifted pretty short-term. Volatility is likely. The tug-of-war between fear of the upcoming election (FOTUE) and fear of missing out (FOMO) begins.
Have a good week.