Weekly Market Update – October 19, 2020

AS EARNINGS SEASON KICKS OFF, STOCKS ENDURE A CHOPPY WEEK PUNCTUATED BY LOTS OF UNCERTAINTIES AND VOLATILITY

• As earnings season kicked off, glass-half full investors will say that stocks ended the week higher, but just barely
• Technically, one can say that NASDAQ trounced the other indices as it advanced 0.8%, whereas the S&P 500 was up just 0.2% and the DJIA was up just 0.1%
• The smaller-cap Russell 2000 Index reversed course from last week and dropped 0.2%
• Of the S&P 500 sectors, almost half of them finished the week higher with Industrials up 1.1% and Consumer Staples up 0.7%
• But more than half of the S&P 500 sectors were negative on the week, with Energy and Real Estate losing more than 2% each
• On the earnings front, the season started with the big banks reporting first and the results were met with yawns
• Most of the week was consumed with more coronavirus worries, especially an uptick in U.S. cases and another round of lockdowns in Europe as well as concern that Washington was not much closer to another stimulus agreement
• The week was bookended by market jumps, as Monday saw the market up 1.6%, followed by 3 days of negative numbers and ending Friday barely in the green
• Volatility, as measured by the VIX, increased throughout the week, spiking Thursday morning, before trending down on Friday
• The 10-year Treasury ended the week at 0.74% and the U.S. Dollar Index advanced 0.7%

Stocks Inch Up on the Week

U.S. equity markets ended the week up, as NASDAQ, the S&P 500 and DJIA all ended the week up less than 1%. It seemed as if there was cloud over the markets for most of the week, as investors were bracing for a terrible earnings season while hoping for another COVID-stimulus package from Washington. The bulk of the week saw negative numbers, as rising U.S. COVID cases worried Wall Street about another economic lockdown.

But then on Friday, retail sales data was released, and the market perked up, as consumer spending continued its (relatively) strong streak.

Retail Sales Jump

On Friday morning, the U.S. Census Bureau released its advance estimates of U.S. retail and food services sales for September 2020 and by all accounts, the estimates exceeded expectations significantly. Here is what was released:

• U.S. retail and food services sales for September 2020 were $549.3 billion, an increase of 1.9% from the previous month and 5.4% above September 2019
• Total sales for the July 2020 through September 2020 period were up 3.6% from the same period a year ago
• Retail trade sales were up 1.9% from August 2020 and 8.2% above last year
• Nonstore retailers were up 23.8% from September 2019, while building material and garden equipment and supplies dealers were up 19.1% from last year

Small Businesses More Optimistic

The National Federation of Independent Business released its Small Business Economic Trends data on October 14^th and reported that the NFIB Optimism Index rose 3.8 points to 104.0 in September, a historically high reading, with 9 of the 10 index components improving.

The release from the NFIB also noted that other findings included:

• Earnings trends over the past 3 months improved 13 points to a net negative 12% reporting higher earnings
• Owners expecting better business conditions over the next 6 months improved 8 points to a net 32%
• Real sales expectations in the next 3 months increased 5 points to a net 8%
• Inventory investment plans over the next 3 to 6 months increased by 5 points to a net 11%
• The percent of owners thinking it’s a good time to expand increased 1 point to 13%

Keep an Eye on Q3 Earnings Season

Heading into Q3, as happened in Q2, many companies are having difficulty providing an estimate for future earnings due to the uncertainty surrounding the impacts of COVID-19. As a result, they are simply withdrawing guidance altogether. Consider this from research firm FactSet earlier in October:

• Heading into the third quarter earnings season, 147 stated that they were not providing EPS guidance or confirmed a previous withdrawal of EPS guidance for either FY 2020 or FY 2021. Almost all of these companies cited the uncertainty of the future economic impacts of COVID-19 as the reason for not providing or withdrawing guidance.
• At the sector level, the Consumer Discretionary (33) and Industrials (27) sectors had the highest number of companies withdrawing or not providing annual EPS guidance.

But there could be another reason more companies are pulling guidance: companies just don’t want to admit how bad the Q3 Earnings Season will be. On October 12^th, FactSet reported that the S&P 500 is expected to report a year-over-year decline in earnings of more than 15% for the third quarter.

Sources:
census.gov; nfib.com; factset.com;
fidelity.com; msci.com; Nasdaq.com; wsj.com; Morningstar.com