Head-snapping pre-election volatility seems to be continuing. Monday begins with a broad-based rally and an easing of the VIX, but the week is young, with plenty of data ahead, including a Fed meeting and the monthly payrolls report.
Election week dawns with market on comeback trail following strong Chinese data
Volume has been drifting lower amid pre-election hesitance, so moves could be more dramatic
Crowded earnings and data week ahead, with Bank of England meeting, payrolls
(Monday Market Open) The market feels like a pogo stick, bouncing early Monday after suffering its worst week since March. This sudden enthusiasm the day before the election could reflect a feeling that whoever wins, one of the first things they’re likely to do is start spending a lot of money whether it’s on stimulus, infrastructure or anything else that might help the economy.
The early rally also could reflect spillover after the market roared back in the final minutes Friday. That move appeared to be ignited by the Fed announcing a plan to help small businesses, raising confidence that the central bank won’t just sit back and wait for Congress and whoever is president to get something done.
Then there was good manufacturing data out of China earlier this morning that helped get Asia’s markets started and traveled west to Europe. Some of that could be winging its way across the Atlantic to Wall Street right now.
The way things feel, though, stocks could just as easily move sharply lower on the next piece of news. The point is, there’s just not a lot of direction right now and no one really knows where this thing is going. Headline sensitivity is at a peak. Volatility is at four-month highs, and sudden shifts and changes in direction are highly likely.
That’s what happened in 2016 when the election approached, if you remember. That night featured an epic drop in futures prices when it looked like there might be a contested result. Then stocks came roaring back when it became clear a winner would be declared. That’s the kind of situation we could be experiencing tomorrow night, too.
As an investor, hopefully you’ve gotten your portfolio into a place where you’re comfortable to ride out whatever happens tomorrow and in the days ahead. This is arguably not the time to be making big moves and getting caught up in all the drama. Volatility can be great if you’re a trader, of course, but even if you are, this could be a week to take extra care. Consider keeping positions smaller than normal if you’re moving in and out of the market.
It’s probably not surprising then, that volume has been kind of muted the last few sessions and could remain that way. Lower volume has a way of making market moves more dramatic than normal. And don’t forget that the election isn’t the end of the craziness. Right after that we push right back into employment numbers and lots of earnings every day.
People could be feeling hesitant with some big earnings data early this week, the election tomorrow, trade balance data on Wednesday, the Bank of England meeting on Thursday, and payrolls data Friday. Add in COVID-19 and a Fed meeting on top of all that and you could have yourself one heck of a crowded week.
There’s a heavy data and earnings calendar on tap, with construction spending, October auto sales, factory orders, and—last but probably first in investors’ hearts—Friday’s October payrolls report.
We’ll talk more later this week about how Wall Street sees payrolls shaping up. As a reminder, September payrolls rose 661,000, well below analysts’ expectations.
Let’s not forget earnings, either. PayPal (PYPL) and Clorox (CLX) are two of the highlights today, and CLX looked pretty good, beating the Street’s estimates. PYPL is after the close. Other company results to consider watching closely in the days ahead include Peloton (PTON), Uber (UBER), General Motors (GM), Wayfair (W), and a bunch of hotel and travel-related companies that could provide color on how that industry is coping with the latest surge in virus cases.
In another arena, crude just can’t get itself going here. It’s down again to start the week, though it’s off its worst lows near $34 a barrel where it was getting pounded overnight. The problem appears pretty simple: Not enough demand.
Technically, a lot of damage got done on the charts last week. The Dow Jones Industrial Average ($DJI) retested its 200-day moving average (before settling above it) and the SPX took out its 50-day and 100-day moving averages. There appears to be potential technical support near the SPX 200-day moving average at around 3130, but that’s still a long way down, so perhaps look for bulls to defend the psychological 3200 handle if things fall further.
That doesn’t mean the last two months of 2020 are necessarily a lost cause, but the fact that the S&P 500 Index (SPX) twice tested levels above 3500 over the last two months and sank quickly both times suggests there’s not much appetite to chase things higher for now with so much uncertainty around. Remember—September and October were the first two months in a row of losses for the major indices since March.
A steepening Cboe Volatility Index (VIX) like we saw last week is often an alarm bell that tells you the market is going to make a major turn. Having said that, it still feels like any further downturn could generate buying interest simply because the rock bottom rate environment and the Fed’s commitment to continued dovish policy leaves investors in a “TINA” situation regarding stocks, meaning “There Is No Alternative.” That’s not necessarily the case—longer-term Treasury notes and corporate bonds are also out there—but investors seem to be gravitating more into high-yielding stock sectors like Utilities. Bonds took a dive late Friday and the 10-year yield is back near 0.85% to start the week.
CHART OF THE DAY: GOING THE “WRONG” WAY: Last week saw two metrics crossing tracks in directions that don’t necessarily bode well for the stock market. Crude oil (/CL—candlestick) met the Cboe Volatility Index (VIX—purple line) as crude moved down and VIX moved up. This marked the first time in nearly two months that VIX traded above crude, something that might have seemed hard to believe back in say, 2014, when crude was regularly at $100 a barrel. Data Source: CME Group, Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
The Data No One Wished For: While we’re all on pins and needles awaiting the election (and anything that might prolong it), traders also have a close eye on COVID-19 statistics. As noted here last week, hospitalizations are going up and that has people nervous. Another thing to follow is the caseload itself, because it’s reached levels where it peaked in the past. If the daily numbers go down for a few days, it might signal the wave is starting to pass, cheering investors. As noted last week, traders continue to scrutinize not just the number of cases, but the number of hospitalizations and deaths. There was a New York Times report Friday that the city isn’t seeing the same intensity of severe illness in this wave as it saw this spring. The article said that could reflect better ways of treating the virus and younger people getting it.
Shutdowns Raise Job Uncertainty: Payrolls for October this Friday won’t reflect much of the recent COVID-related shutdowns. Those were probably one of the reasons things fell apart last week. Not that shutdowns alone caused the worst stock market week since March, but they could start to reflect in jobs data, including weekly claims, as we move ahead. The dagger probably is that these new shutdowns in places like Illinois come at a time when there’s no government stimulus in place to help employees of struggling businesses. If there were, shutdowns might be an easier pill to swallow. As it is, some businesses and towns, particularly in the Chicago area, say they plan to defy the shutdown orders and that restaurants are being unfairly blamed for the virus spread.
Fed Fireworks Seen Unlikely at This Week’s Meeting: There’s also a Fed meeting this week. The Fed apparently gave the market a late lift Friday when it said it’s reducing minimum loan sizes for smaller businesses that want to use the Fed’s lending program. It’s also easing restrictions on debt for companies already using the program.
Basically, the Fed is trying to inject more money into the economy—something Congress and the White House haven’t done with a stimulus since spring—which would possibly drive up economic growth expectations. The idea could be that this might help small businesses bridge the gap between now and any fiscal stimulus.
The Fed isn’t expected to make any rate changes at its meeting, which takes place Wednesday and Thursday instead of the normal Tuesday and Wednesday due to the election. It’s not going to release any new rate projections either. Instead, this is more than likely to be a kind of “been there, done that” meeting that we can mark off the calendar and get on to different things.
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