October Market Recap
November 2, 2020
Stocks fell for the second month in a row as earnings announcements and election angst were top of mind for most investors in October.
While the focus today is rightly on the imminent US elections, last month began with an eye toward corporate earnings, specifically the latest results from Technology giants responsible for some of the largest gains since March. Strangely enough, four of the five largest companies in the US stock market (Apple, Amazon, Alphabet, and Facebook) all reported quarterly earnings on the same day, October 29. The fifth company (Microsoft) reported just two days earlier.
Those announcements coincided with a spike in volatility. The S&P 500, Dow Jones Industrial Average, and NASDAQ all fell close to 6% in the final week of October, a drop made more violent by heightened anxiety about the looming Presidential election, the potential for a contested result, and which party will control the US Senate.
Utilities (+5%) was one of only two sectors in the S&P 500 to finish positive last month. Communication Services (+0.8%) was the other. Technology was the worst-performing sector, falling more than 5% for the second straight month, though it remains the best-performing sector year-to-date. Energy (-4.4%) and Health Care (-3.7%) were others that underperformed in October.
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With roughly two-thirds of the companies in the S&P 500 having reported, 86% have beaten consensus earnings estimates, according to data analytics firm FactSet. If that number (86%) holds, it would mark the highest percentage of companies to beat estimates since FactSet began tracking such data in 2008.
Better earnings and future guidance combined with lower stock prices mean Price-to-Earnings (P/E) ratios have moderated (at least a bit) from exceptionally high levels. As of October 30, the S&P’s 12-month forward P/E stood at 20.6. That’s still well above its 5-year average (17.3), but down from 21.5 at the end of September.
The US economy posted a predictably big number when it was announced our country’s GDP grew 33.1% (annualized) in the third quarter. The GDP gains are relative, of course, coming on the heels of a 31.4% collapse in GDP during the previous three months. Time will tell if a potential third wave in COVID-19 cases and hospitalizations will derail these legitimate economic gains.
Interest rates drifted higher for the first time in months. The benchmark 10-year Treasury bond yielded 0.86% at the end of October, its highest mark since early June. 10-year Treasury yields have not eclipsed 1% since mid-March. Slightly higher rates do little, however, to appease investors searching for a reasonable return on safe assets. Our current economic environment, unfortunately, is one in which risk-free assets pay next to nothing.
One thing October did not bring was a new stimulus deal from Congress. Rumors swirled that a second, smaller legislative package could be in the works, but little materialized in negotiations between Treasury Secretary Steve Mnuchin and House Speaker Nancy Pelosi. Truthfully, the next big stimulus from Washington to help US businesses and families is unlikely to come before February, after the winners from this week’s elections have taken their seats on Capitol Hill.
That reality leaves a larger burden to bear for the Federal Reserve, who meets November 4-5 and stands ready (and definitely willing) to inject more liquidity into the system should financial markets weaken further.
Small-cap equities outperformed in October. The Russell 2000 gained 2%, considerably better than the larger-cap US indices. One month does not yet make a trend, but stronger relative performance from smaller companies is a sign investors may be rotating toward stocks that have risen less from their March lows.
October brought an interesting disparity in International equity returns. Non-US Developing Markets fell 3.6%, mostly in line with US stocks. Emerging Markets meanwhile gained 1.4% thanks to a heavy weighting in China.
Oil prices fell more than 10% last week and ended October near their lowest level since May. West Texas Intermediate Crude traded under $36 per barrel compared to roughly $40 per barrel a month ago.
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