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].
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].
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.
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
Earnings
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.
Covid
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.
Stimulus
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.
US Q3 GDP
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.
To download a copy of this commentary and the chart of the week, click the button below.
To discuss how we can empower you please contact us at 866.371.2399 ext. 202 or info@horizoninvestments.com.
Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This report does not attempt to examine all the facts and circumstances that may be relevant to any company, industry or security mentioned herein. We are not soliciting any action based on this document. It is for the general information of clients of Horizon Investments, LLC (“Horizon”). This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this document, clients should consider whether the security in question is suitable for their particular circumstances and, if necessary, seek professional advice. Investors may realize losses on any investments. It is not possible to invest directly in an index.
Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. This commentary is based on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Opinions expressed herein are our opinions as of the date of this document. We do not intend to and will not endeavor to update the information discussed in this document. No part of this document may be (i) copied, photocopied, or duplicated in any form by any means or (ii) redistributed without Horizon’s prior written consent.
Other disclosure information is available at www.horizoninvestments.com.
Horizon Investments and the Horizon H are registered trademarks of Horizon Investments, LLC
©2020 Horizon Investments LLC
The staples companies were not hurt on the input side...
Insights
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].
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].
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.
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
Earnings
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.
Covid
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.
Stimulus
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.
US Q3 GDP
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.
To download a copy of this commentary and the chart of the week, click the button below.
To discuss how we can empower you please contact us at 866.371.2399 ext. 202 or info@horizoninvestments.com.
Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This report does not attempt to examine all the facts and circumstances that may be relevant to any company, industry or security mentioned herein. We are not soliciting any action based on this document. It is for the general information of clients of Horizon Investments, LLC (“Horizon”). This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this document, clients should consider whether the security in question is suitable for their particular circumstances and, if necessary, seek professional advice. Investors may realize losses on any investments. It is not possible to invest directly in an index.
Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. This commentary is based on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Opinions expressed herein are our opinions as of the date of this document. We do not intend to and will not endeavor to update the information discussed in this document. No part of this document may be (i) copied, photocopied, or duplicated in any form by any means or (ii) redistributed without Horizon’s prior written consent.
Other disclosure information is available at www.horizoninvestments.com.
Horizon Investments and the Horizon H are registered trademarks of Horizon Investments, LLC
©2020 Horizon Investments LLC