Market More Focused On Stimulus Than Covid But That Could Change

S&P 500 realizes no stimulus before election

The S&P 500 broke its 3-week positive streak, closing 0.5% lower [Figure 1]. The market finally realized that a fresh stimulus package most likely won’t be passed before the election, and may even need to wait until next year. International markets outperformed, helped by a weaker USD (BBDXY -0.9%). Emerging markets led last week (MXEF +1.1%), while international developed markets added 0.1% (MXEA) [Figure 1].

Weekly equity market returns

Vaccine optimism returns as Phase 3 trials restart

Peering under the hood domestically, value and smaller caps led [Figure 1], which flies in the face of prevailing wisdom that more stimulus is needed to help these beaten down sectors. So what drove this price action? Likely higher interest rates and additional optimism around a vaccine, with two major Phase 3 trials restarted last week.

After last Monday’s sell-off, it was a pretty quiet week. Earnings continued to roll in, but all the market’s focus was on the potential for future events: vaccines, reopenings, the election, and stimulus. The fact that negative news about Covid and related shutdowns wasn’t a focus last week suggests more bullish sentiment may be prevailing.

Mega caps to report earnings this week

This week, however, earnings will be hard to ignore, with many of the mega caps reporting. Indeed, by market cap, almost 50% of the S&P 500 and almost 60% of the Nasdaq 100 will report this week. Thursday after the close is especially jam-packed, with 4 of the top 5 names in the S&P 500 reporting (~18% market cap). There have been some signs that earnings have been pulled forward already in the first half of 2020. If some of these mega cap companies show similar attributes, it could be tough for the market to digest and cause some factor volatility as investors adjust positions.

Final presidential debate did little to change race

Thursday night’s Presidential Debate was much more civil than the prior one, but, in the end, it doesn’t appear to have impacted the race that much. Early turnout is very strong, making predictions especially difficult to make with confidence. Given the focus on stimulus, we are paying close attention to the outlook for the Senate, and would note that the odds of a Democratic majority there fell dramatically last week [Figure 2].

Odds of a Democratic Senate decrease

As Covid rages, potential for more restrictive measures 

Covid continues to rage in Europe, setting new daily case records and causing additional restrictive measures. The same is happening in the U.S., but with a lag. As noted above, this is not the market’s focus right now, but given the level of optimism around all those future developments—much of it well-founded—the market is increasingly vulnerable to Covid news that may cause additional restrictive measures to be put in place. Indeed, the equity sell-off at the start of this week (October 26th) could be a sign of that, and we are closely watching for indications that US policymakers may be considering implementing additional restrictive measures.


Yield curve steepened dramatically last week

Last week, all of the action was in fixed income: specifically, the long-end of the government yield curve. The curve steepened dramatically on the back of the biggest weekly move in the 30-Year U.S. Treasury (UST) since late August [Figure 3]. The 2-Year Treasury was up 1 basis point (bps) and the 10-Year and 30-Year were up 10 bps and 11 bps, respectively. 

Yield curve steepest since the post 2016 election period

This move felt largely technical to us. Speculative positioning in steepeners and outright short the long-end are warning signs of a market vulnerable to a reversal. The move higher in nominal yields has outpaced that of inflation breakevens, a sign that the core message of the UST market—lower growth and slower inflation—hasn’t changed. Credit spreads declined last week, outperforming government bonds. Investment-grade (IG) fell 2 bps and high-yield (HY), 3 bps.

Will European Central Bank meeting point to additional easing?

With Fed members entering the period of no public comments ahead of their Federal Open Market Committee (FOMC) meeting on November 4-5, the focus this week is on the rest of the world’s central banks. 

The pace of easing everywhere has slowed in recent months, but eyes are on Thursday’s ECB meeting. Virus cases have surged in Europe against already flagging growth momentum, and expectations are building around major additional easing measures in December. Market players expect this week’s meeting to set up those additional easing measures.

This likely matters more for European equities and the Euro than interest rates, especially in the U.S. given the focus on stimulus. But it’s a good reminder that the monetary easing pressure is global, not just domestic, and will keep rates low for a long time. In other words, core fixed income will continue to be unattractive for years to come.

What to watch this week  


Microsoft reports Tuesday. Apple, Amazon, Google, and Facebook all report after the bell on Thursday to round out the top 5 most valuable names in the S&P 500 (SPX). These Big Tech companies dominate the S&P 500. In just the past 3 years, they’ve gone from accounting for an already sizable 13% of the index to now making up nearly 23% by market cap [Figure 5]. Given signs that earnings may have been pulled forward already in the first half of 2020, if some of these market winners show similar attributes, it may be tough for the market to digest. In that case, we may see some factor volatility as investors adjust positions.

Market cap weight of Big Tech names in S&P 500


Covid cases in the U.S. and Europe will get more attention than previously. The surge in Covid cases in the upper midwest, in particular, could have political ramifications for Republicans in the upcoming election. With the 7-day average of new cases in the U.S. now just shy of 69,000, the highest ever reported since the pandemic began, expect the market to be more focused on Covid news and the potential for states and municipalities to enact more restrictive measures to control the virus’ spread. 


There’s always room for some new development on the stimulus front. Though as of this writing, the market was down at the Monday opening, seemingly as a result of not only rising Covid concerns but also due to reports that House Speaker Pelosi and the White House were still at odds (at least on the language) related to major issues like coronavirus testing and jobless benefits.

US Consumer Confidence 

The consumer has been the primary source of strength in the U.S. recovery. Last month, consumer confidence surged. Consensus is that those gains will hold this month. As Covid cases increase and stimulus remains a ways off, it will be important to see confidence remain elevated.


U.S. GDP is expected to increase ~32% quarter-over-quarter (QoQ) annualized from Q2’s 31% contraction. While this is old news and unlikely to change anything, a stronger-than-expected number could have political ramifications.


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