The equity markets finished the worst week since March and ended the month in negative territory. The TSX fell 4.6% in the week bringing the year-to-date return to a negative 8.8%, the S&P 500 dropped 5.6% as the technology sector came under pressure in the week but still remaining positive year-to-date 1.2%. The Nasdaq was weaker for the week but still remains up 21.61% year to date. The broader-based equity indices weekly retracement exceeded 6%, bringing the year-to-date returns for both the S&P MidCap 400 and the Russell 2000 to 8.23% and 8.13% respectively. The two primary sectors driving the negative returns were the information technology and consumer discretionary sectors while utilities, materials and real estate held up. Also, the VIX index topped 40 the first time since early June.
Monday set the tone for the week as concerns over the surging number of coronavirus cases in Europe and US caught the attention of investors along with declining expectations of a further stimulus deal before the US election. The number of hospitalizations seemed to tip the scales in Europe with several the largest countries reacting with new lockdown restrictions. The latest coming on Saturday as the UK re-instated lockdown measures. Positive news from AstraZeneca reporting a strong immune response in elderly from their vaccine had little impact on investor sentiment.
Economic data was supportive with a strong Canadian GDP for August at 1.2% and in the US with the reporting of a 33.1% annualized rate compared to the “whisper” number of 31%. While impressive, the recovery of GDP is only 65% of the economic decline to date for the year. The initial weekly jobless claims in the US fell by 40,000 to 751,000, the lowest number since March 14, versus the expectations of 778,000. Continuing claims in the US continued the steady decline to 7.8 million from 8.5 million. The Commerce Department reported durable goods orders improving 1.9% and core capital goods excluding defense and aircraft hitting a 6-year high. US Consumer sentiment moved marginally higher for October at 81.8 compared to the September final reading of 80.4. Sentiment is creeping higher but still significantly lower than the February high of 101. The slow creep of increasing sentiment data could be attributed to the uncertainly of the US election, the devastation to small businesses and the uptick in coronavirus. Personal spending and income both showed improvement in September. For an earnings up-date as reported by FactSet, 64% of the S&P 500 have reported Q3 results. Of that number 86% of the S&P 500 companies have reported positive earnings surprises and revenue surprises. To put into context, while impressive, the blended earnings decline for the S&P 500 is -9.8% for the quarter. For the full report, the link can be found below.
As we head into the US election, unless there is a massive sweep, it is universally accepted there will not be a declared winner on election night. Already, court challenges have commenced and are likely to continue until one side or the other admits little hope in reversing the outcome. Many cities are bracing for civil unrest in what may be the most contentious and corrupt election in the history of the US. Some have suggested this past week’s volatility is a precursor to a Biden/Harris win and the uncertainty surrounding economic policies including taxation, stimulus, and the response to COVID. The current global COVID response is eliciting more scientists and medical practitioners coming forward denouncing the mismanagement and emphasizing the collateral damage is much more severe than our leaders and media are willing to admit. As a result, if present policies of economic lockdowns persist as we move through 2021, expect the recovery to slow, and dislocations causing pricing pressures in essential goods and services. Already in Europe with more severe lockdown measures than in the US, there is talk of a COVID second recession. Coupled with the growing unsustainable debt levels, we are headed into an environment that is anything but returning to normal.
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Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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