Quarter Flip: As Q3 Ends, Investors Focus on Contentious Debate That Failed to Resolve Concerns

The quarter ends with markets pointing downward following last night’s contentious debate that failed to paint a real picture of what candidates see for the future. Disney layoffs add another negative element.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/White House: Flat ahead of debate
5 min read
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Key Takeaways

  • Debate didn’t end concern about potential election volatility, weighing on stocks

  • Concerns rise about climbing virus caseload in U.S., but hopes grow for treatment
  • Final read on Q2 GDP is negative-31.4%, wrapping up a dismal second quarter

(Wednesday Market Open) Anyone hoping last night’s debate would calm the political waters arguably didn’t get their wish, and that could be one reason stock indices remain under pressure early Wednesday. 

As one person wrote on Twitter (TWTR), “The next debate is probably going to be a fist fight in a fast-food parking lot.” Well, not literally, of course, but all the focus last night on jabs to the face meant neither candidate really painted a picture of what they think America should look like going forward, and that was something people did want to hear.

Add that to a rise in virus cases and you get a recipe for a lower opening, with stock indices dipping into the red again following Tuesday’s declines. September is now on pace to be the first negative month since March, with the S&P 500 Index (SPX) entering today down nearly 5% since Aug. 31. Interestingly, the market had been doing pretty well during the debate itself but then fell going into the last hours ahead of the bell. 

Also in the unhappy news department and arguably more important than the debate from a market perspective, Walt Disney (DIS) announced plans to lay off 28,000 workers—primarily at its flagship theme parks in Florida and California—due to the virus impact. Sometimes layoff announcements are welcomed by the street, as it’s seen as a sign of workforce efficiency. This is not one of those cases. 

As much as we talk about movies and streaming, the theme park business remains part of the core at DIS, representing about 37% of revenue. And since these layoffs of a significant portion of its workforce could mark a material change to the outlook of its core business, shares were hit in the overnight market, falling 2%. 

Looking for good news? Maybe check out Regeneron (REGN), which announced the first data from a trial of its investigational “cocktail” treatment for the coronavirus and said it reduced the viral load and reduced the amount of time to “symptom alleviation,” which is a fancy way of saying it made people feel better more quickly than a placebo. Safety also looked good, analysts said. Shares of REGN rose about 1.6% in pre-market trading. 

Almost lost amid recaps of the debate and concerns about the virus, today also brings a final look at Q2 gross domestic product (GDP). The number came in at negative-31.4%. Most investors will probably say “good riddance” to what was an awful quarter, and hope for better in Q3.

The big data point looking ahead to Thursday is weekly initial jobless claims. Consensus on Wall Street now is for a headline figure of 850,000, down just a touch from 870,000 a week earlier, according to research firm Briefing.com. This figure has stubbornly been refusing to go down much lately, so any sign of progress would be very welcome, though it’s too late for any fresh data to factor into the monthly payrolls report due Friday.

There’s also still hope that Congress and the White House can make something happen on a stimulus, and that appears to be one thing keeping markets from sliding too far down right now. 

A couple of new direct listings hit Wall Street today, too. Remember, though, that it’s often best to let the dust settle before venturing into these with any big trades, and also to make sure you understand the companies’ financials, risks, and competition.

Bye Bye Q3

Welcome to the last day of Q3. With Tuesday’s pause from a three-day rally factored in, the SPX is up more than 7% this quarter—not bad if you consider how tough September turned out to be. 

The Nasdaq (COMP), which got battered this month as investors began giving Tech a fish eye, is up 9% for the quarter. Small-caps in the Russell 2000 Index (RUT) rose the least, up 5.6%. Still, the RUT bounced back pretty nicely in the last week or so, climbing nearly 5% from its September lows. 

With Q3 wrapping up, be prepared for some possible volatility as a few of the bigger institutional funds might be in position-squaring mode today. September tends to be rough from a season perspective while October through December are often thought of as a stronger time seasonally, so there’s another thing to keep in mind. That said, past isn’t necessarily precedent. 

Tuesday was almost the polar opposite of Monday, when all 11 sectors rose. Instead, nine of the 11 fell yesterday, with a steep decline for Energy a day after it had made some progress getting up the basement stairs. Energy’s losses coincided with crude oil dropping to the red side of the $40 a barrel mark, a level it’s been hovering around for weeks. Crude remained weak early Wednesday.

Watching Crude, VIX, as Drama Builds Ahead of Payrolls Report

What are some things to potentially watch and listen for today, besides any scuttlebutt about last night’s debate? 

First of all, the crude market appears to be back to trading market fundamentals lately, instead of going up on a weak dollar or going down on virus fears. Sure, the recent U.S. uptick in virus cases might have provided some of the weight Tuesday, but more attention seems focused on worries about growing U.S. supplies. We’ll get word later this morning from the U.S. government if there was a supply build last week, something some analysts expect to see. 

The second thing to consider today is volatility, which has really taken a breather the last few days and remained under pressure Tuesday despite a falling stock market. The Cboe Volatility Index (VIX) traded near 26 yesterday, and hasn’t made much of an effort to rally toward 30 since last week. The futures complex still predicts a rise above 30 over the next month or so, peaking near 32 around the election, but most futures contracts stepped back Tuesday.

Any sign of VIX creeping up could signal that the election or growing virus fears are having a deeper impact on the market, and that intraday volatility might become an issue again. For those who make a lot of trades, it would probably be a good idea to keep trade sizes lower than usual at such times. 

Consumer Confidence Might Throw New Light on Employment

Data play a bigger role as we head toward Friday, mainly because the payrolls report looms (see more below). However, there was a little surprising data Tuesday with September consumer confidence soaring to 101.8 from August’s reading of 86.3. That’s still well below levels from earlier this year before the pandemic, but kind of goes against a lot of talk on Wall Street lately that lack of a federal stimulus is making people less eager to get out and buy. 

It also could reflect decent business conditions, because people who have jobs are more likely to be optimistic about the economy. With that in mind, maybe we could hear more bullish thoughts about what payrolls might bring. Still, it would be important to see the confidence number continue to impress in coming months, because one month isn’t a trend. 

Technically, the S&P 500 Index (SPX) continued to bump its head Tuesday against what looks like resistance at the 50-day moving average near 3355. A close above that level potentially could pull more buyers in, but if we see more struggles to get there, some people might get off the bus.

CHART OF THE DAY: PLAYING CATCH-UP: Small-cap stocks, seen represented by the Russell 2000 Index (RUT—candlestick), have generally had a hard time this quarter keeping up with the S&P 500 Index (SPX—purple line). There’s been a bit of catch-up over the last week as the RUT generally performed well, but this is a relationship probably worth watching in Q4 as the election looms. Small-caps often do a better job than large-caps in reflecting the domestic economy. Data Sources: FTSE Russell, S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Payrolls Preview: With the first presidential debate out of the way, focus could shift toward Friday’s September payrolls report. It’s the last one anyone will see before next month’s election, so political implications are possible. Last time out, in August, the pace of job growth slowed from spring and summer, though the unemployment rate continued trending down. The September report is expected to show another slide in job creation, this time to 800,000, according to Wall Street consensus reported by research firm Briefing.com. That would be down from the 1.37 million jobs added in August and 1.73 million in July, but still way above historic averages. The actual unemployment rate, which tends to be the number that gets headlines down the stretch in a presidential race, was 8.4% in August and is expected to be 8.2% in September, Briefing.com said. 

Deeper Dive into Data: Looking a bit more closely at the numbers, there are several things investors might want to keep an eye on in Friday’s report. First of all, government positions rose sharply in the summer, which might have given those reports a bit more pop than normal. If government hiring slowed in September, as some analysts suspect, that could take some juice out of Friday’s headline figure.

Also consider checking average hourly earnings, another piece of data you might hear more about as the presidential race goes into its final weeks. Last time out, wages rose 0.4% month over month and 4.7% year-over-year, both pretty strong figures. Sometimes higher wages reflect more people getting jobs in better-paying industries like business, construction, and manufacturing, so check the report for any indications of those sectors recovering. A lot of the big summer surge in jobs coming back from the pandemic shutdown was in lower-paying industries like retail, leisure, and hospitality. It would also be a good thing to see labor force participation move higher. It was a pretty soft 61.7% in August, down from 63.2% a year earlier. 

Chipmaker Reports: Semiconductor company Micron (MU) managed to beat analysts’ bottom-and top-line estimates late Tuesday on strong performance of its chips used in cloud, PC, and gaming consoles. There’s where you can see more impact from the “stay-at-home” economy and how it benefits Tech. 

However, the stock fell in post-market trading after rising during Tuesday’s session and helping lead some other chip stocks higher, as well. The rough edge of the earnings report yesterday appeared to be concerns over loss of revenue to Chinese firm Huawei, which some analysts said helped account for “light” guidance from MU.

Consider keeping an eye on the chip sector today to see if there’s any more fallout from MU’s report. The company’s shares haven’t done as well as most of the chip sector so far this year, but had a good day last quarter after MU reported better than expected earnings.

Good Trading,
JJ
@TDAJJKinahan

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This week’s economic calendar. Source: Briefing.com
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Key Takeaways

  • Debate didn’t end concern about potential election volatility, weighing on stocks

  • Concerns rise about climbing virus caseload in U.S., but hopes grow for treatment
  • Final read on Q2 GDP is negative-31.4%, wrapping up a dismal second quarter

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