"The more I learn, the more I realize how much I don't know."
- Albert Einstein
The Road Travelled
Just what was that? That incredible week, just experienced across not just financial markets, but throughout our national experience. Sure, in the end, we seem able to quantify. I have always loved mathematics for this reason. In math, there is only one truth that is correct. Numbers are so much easier to deal with than words. Even when incorrect, one can almost always see for themselves where they made "their own" mistake. One can correct on the fly, or simply in preparation for "next time." There is purity in that.
There is purity in life itself, not yours or mine, for we are all individually skewed in some way toward something that someone else would see as abnormal. It is the substance of societal existence that is far less easily identifiable, and far more opaque. The very concept of community suggests the abilities of individuals to afford others... a kind of tolerance or a level of mutual respect above and beyond where the accidentally selfish or subconsciously narcissist mind might go on its own. No, I will not, and you should not point that finger. Quiet time now, for in the introspection of one's own thoughts and deeds, there are always traits of character in need of maintenance... or in some cases in need of repair.
Equity markets roared for the first full week of October. How aggressive was this demand? Let me put it this way. There was a significant appetite for the blue chips. The Dow Jones Industrial Average soared 3.27%. That means that the Dow 30 was decisively outperformed by just about every other measure of market read-out that we have. At the headline level, the Nasdaq Composite gained 4.6%, and the S&P 500 ended the week 3.8% above where it began. Beneath the radar, it gets even better. The small-caps were way out in front, the Russell 2000 running 6.4%, the S&P 600 up 5.7%. The Dow Transports ran 5%, and the mid-cap S&P 400 moved 4.9% higher for the week. In short, not only did the markets rally hard into week's end, they rallied broadly. Very broadly.
All 11 S&P equity market sectors contributed positive weeks. Six of these 11 sectors saw their SPDR Select Sector ETFs run 4% or more, while the most sluggish among them, the REITs ( (XLRE) ) still saw a gain of 1.4%. All impressed, just without truly impressive trading volume. We've gone over that. While that does mean that there is still likely a certain percentage of managed money remaining less than convinced, we must consider the why's...Why are markets behaving this way, and the where is the "where" that these markets can go from here?
All About Stimulus?
Yes, ...and no. Actually, no. Sure, markets reacted negatively to President Trump's public termination of negotiation in working toward another round of fiscal support, and then just as quickly cheered when negotiations continued on regardless. I think there is more to it than the demand for risk assets that has left the S&P 500 once again trading at 22 times forward looking earnings, just as we head into Q3 reporting season.
Markets might be pricing in something of an electoral blue sweep. Now, most would consider this a market negative, and it may very well be in the longer run as taxes go higher and an increased regulatory environment constricts business activity. Why would investors buy this market here then?
What if this has more to do with a contested election having already been priced in to a certain degree, and the (read this part slowly) uncertainty of an uncertain electoral outcome has become less certain? Then something had to be priced back in, right?
Furthermore, while the administration has gone as high as a targeted $1.8 trillion on such a package prior to election, they seem to stand alone. Republican support in the Senate for something even that expensive remains questionable, while the Democratic majority in the House, believing they hold the high ground sees the need only to come as far as needed so as not to end up bearing the blame for a month. Most believe a blue sweep results in a much larger, much less defined stimulus package. Surely a short-term market positive. All that might be left could be timing the taking of profits so that capital gains taxes are taken under the current tax regime, and not the next one. That would be a costly mistake.
The rally may have had more to do with the current president's health than any fiscal help under consideration. The near miraculous recovery of a 74 year old, overweight male after the virus having been caught very early and treated with experimental drugs (in this case, the Regeneron (RGEN) cocktail and Gilead Science's (GILD) Remdesivir) almost immediately, may have had a psychologically positive impact that life could in fact return to something more normal someday semi-soon. Both Regeneron's and Eli Lilly's (LLY) investigational antibody cocktails are in the process of ramping up availability for Emergency Use Authorization. Unfortunately, inventory is not what it needs to be if these drugs work that well.
Did I mention earnings? Yeah, those still matter too.
The Week Ahead...
One contributory factor to what are currently seen as extremely elevated multiples in forward looking equity valuations could be quite simple. Estimates are too low. Possibly. This is a big week. Not only from a macroeconomic perspective, will we see September data for Retail Sales, Industrial Production, and consumer level inflation, but the large financials will unofficially kick off Q3 earnings season starting Tuesday (tomorrow). On top of all of that, Amazon (AMZN) will hold the firm's annual Prime Day event this Tuesday into Wednesday, while Walmart (WMT) , Target (TGT) , and Best Buy (BBY) all hold their own events meant to compete with Amazon this week for the e-commerce dollar.
Show of hands.... Who's doing their holiday shopping this week? Whoa. That looks like it might be all of you. Oh, and don't forget (how could you?) that Apple (AAPL) holds their "Hi, Speed" launch event on Tuesday for the new line-up of 5G capable iPhones. What this means in short is that while the potential for stimulus will start out as the week's headline event, those headlines will evolve throughout the week as corporations themselves start participating in the news cycle again.
With the football on the tee, my favorite earnings tracking service, FactSet sees Q3 earnings for the S&P 500 down what would seem like an awful -20.5% from a year ago. To better put this in perspective, the second quarter hit the tape at -32.6%,and that -20.5% expectation is up from expectations of -21% just one week ago as well as -25.3% as the quarter began on July 1st. Wall Street's analytical community seems to understand that corporate performance, like the economy itself, performed far better than anyone had projected for the three month period covered.
This improved outlook comes even as projections for the Energy sector have continued to weaken. While no sector is expected to show outright earnings growth, Health Care, the Utilities, and Information Technology are expected to come close enough that any of those three sectors actually could. Five sectors are projected to show year over year revenue growth, easily led by Health Care for obvious reasons.
What stocks do from here will, beyond electoral risk and potential stimulus, rely upon fourth quarter guidance. Corporate performance for the fourth quarter is clearly murkier than was the third that provided lower targets for profitability. As the economy has started to move sideways, corporate fundamentals should also reflect that.
Ahead Of The Banks
Do I trust the banks? To make money? Yes. Do I trust the stocks? Not so much. Obviously net interest income will not show a whole lot. What matters is asset management and investment banking. In other words, non-interest income may become more important than it has been in the recent (decades) past in terms of how these stocks are valued.
Even with dividends and buybacks curbed for now, if this group still shows ways to stay profitable, this may just be the time to get re-involved if not already doing so. That said it has to be quality. I still see JP Morgan (JPM) as best in class and have been accumulating this name over the past two weeks going into this week's reports. I remain underweight the group, but any exposure at all is more than I had all summer. What I need to see most of all will be a substantial reduction in provisions for loan-loss reserves. By substantial, I mean a sequential reduction of let's say some 70% or so. That would be a show of confidence.
Economics (All Times Eastern)
Federal Holiday. No Data Schedules For Release.
The Fed (All Times Eastern)
09:00 - Speaker: Minneapolis Fed Pres. Neel Kashkari.
Today's Earnings Highlights (Consensus EPS Expectations)
No Quarterly Results Scheduled For Release.