It’s Volatile Out There: Investors Switch To “Risk-Off” Ahead Of Election
- Worst week for major indices since March as investors flee town ahead of election
- Risk aversion strong throughout week but heightened Friday in equities, fixed income
- Lack of company guidance, virus fears, and stimulus stall all played into weakness
If there were any doubts left about whether the market would be “risk-on” or “risk-off” going into the election, Friday’s selloff pretty much iced it. The toggle has switched to the off position.
The late-week meltdown ignited after earnings from four of the five FAANGs that were mostly positive, but perhaps lacking in the guidance department (see more below). Combine that with the resurgence of Covid-19, the Senate adjourning with no more progress on a stimulus package, and the culmination of a long and contentious election season, and it’s no wonder investors seem ready for a break.
Even before FAANG earnings officially put things on ice, many investors showed signs of risk aversion ahead of the election. That made itself pretty clear with selloffs on Monday and Wednesday. Major indices suffered their worst week since March, and now people are openly making comparisons between this pre-election skid and the one we saw heading into the 2016 election.
As noted this morning, keep an eye on futures Sunday night into Monday, and especially on Tuesday night as returns come in. Election night 2016 was a wild one for the futures market, featuring a steep plunge when it initially looked like results might be contested, followed by a meteoric rally when it became clear there’d be a victor without much fuss or muss.
A wild ride could play out this time if things look testy by late Tuesday night. Or, if it looks relatively smooth, stocks could get a lift. It’s arguably not so much who wins, but whether there’s a chance of a long, drawn-out chaotic fight for a winner.
Late Rally Back; a New Policy from the Fed
A fierce recovery effort at the very end of Friday’s session might put Monday’s open into more solid territory. A late-breaking news item from the Fed about 40 minutes before the close also potentially contributed to the late rally.
The Fed 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. The Fed called these moves “two important ways to better target support to smaller businesses that employ millions of workers and are facing continued revenue shortfalls due to the pandemic.”
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.
Strong Data Raise Hopes for New Week
There are other signs things might improve once the election excitement fades. Economic data have been solid lately. Gross domestic product (GDP) for Q3 came in above estimates yesterday, and initial jobless claims have finally started to ease a bit. New home sales for September were a bit subdued, but that’s the only data all week that looked below average.
The problem is that the good news is hitting a wall of worry centered on the election, Covid-19, and lack of a stimulus. Until we get those behind us (and it could be a while), risk premium in the market might continue unravelling as we saw this week.
Technically, a lot of damage got done on the charts this week. The Dow Jones Industrial Average ($DJI) retested its 200-day moving average (before settling above it—see chart below) and the SPX SPXC 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.
But if you’re following corrections, the Nasdaq NDAQ (COMP) has fallen 10% from its all-time high. The SPX is down 8.7% from its peak, so it’s close but not all the way into correction territory.
Roadmap Left at Home as Guidance Lacking
One thing besides the virus and election that some thought could potentially “catalyze”(is that a word?) Wall Street from its doldrums is earnings season, which is about half over. As usual, media headlines have zeroed in on the number of companies “beating” Wall Street’s expectations.
That stands at about 85% so far, but might not be the best way to judge. That’s because analyst projections were so conservative this quarter that beating them is like your kid receiving a participation trophy. Investors are getting wise to this, too, as you can see this week from some companies like Microsoft MSFT (MSFT) reporting a beat but getting punished because of weak guidance.
Many companies, including Apple AAPL (AAPL), are still holding out and declining to provide guidance. Some cite “uncertainty,” though it’s arguable that no quarter was ever “certain,” even before Covid-19 came along. It’s quite possible that this lack of guidance could be one factor keeping stocks from getting as much of a lift from earnings as normal.
Among the major companies besides AAPL reporting recently but not sharing guidance are General Electric GE (GE), Caterpillar CAT (CAT), 3M MMM (MMM), Xerox XRX (XRX), Raytheon (RTN), and UPS (UPS). Knowing what happened last quarter but not getting forecasts for this quarter leaves investors hanging without a road map.
One More Glance at FAANGs
Earnings from the four reporting FAANGs looked good from a bottom and top-line standpoint, with no major misses. However, it appears that for all but one of the companies, Alphabet (GOOGL), the pre-earnings exuberance got carried away a bit.
That’s because it came down not to the top and bottom lines as much as to the stuff under the surface. With Facebook FB (FB), investors honed in on higher than expected spending levels in Q3. With AAPL, there was disappointment that iPhone sales missed Street expectations It’s hard to find anything really unlikable about Amazon’s AMZN (AMZN) results, but that stock could be suffering a little profit-taking.
The iPhone softness in AAPL’s quarter as customers waited for the new 5G product might actually end up being a tailwind for AAPL going into its December and March quarters. That’s because some of the people who’d previously waited to replace their phones might start doing that in the current quarter. So instead of pulling forward demand, as many Tech companies did early in the pandemic, AAPL kind of “pushed back” demand.
Almost every S&P sector lost ground Friday as this disappointing week came to a close, but none got punished harder than Tech. It fell 2.1% on Friday and is down 2% over the last month. Investors might not be used to Tech being on the defensive this way, but considering the high value of that sector going into election season it’s not all that surprising to see premiums coming out of there more than other sectors.
One asset group that went against the grain Friday was the bond market. Pressure on Treasuries sent the 10-year yield to a new four-month high above 0.87%. Q3 GDP data might have given yields a lift, but it also could reflect the same sort of position-evening we saw in stocks today. People had been trending to the long side of the bond market this week, but didn’t want to go into the weekend with that exposure.
There was also a pretty muted reaction in the Cboe Volatility Index (VIX) today, as it didn’t rise above the psychological 40 level. Maybe there’s not as much concern around the election as people originally thought, or it could also reflect people exiting positions ahead of the weekend.
Quick Look Ahead
Next week features a heavy data calendar, with construction spending, October auto sales, factory orders, and—last but probably first in investors’ hearts—the October payrolls report on Friday.
From an earnings perspective, a lot of the fireworks are over, but there’s no holiday next week. Reporting companies in coming days are expected to include PayPal PYPL (PYPL), Allstat ALL e (ALL), General Motor GM s (GM), Kohl’s KSS (KSS), CVS (CVS), Marriott (MAR), and Norwegian Cruise Line NCLH (NCLH). Those last two could be important to watch for updates on travel demand as the U.S. and Europe fend with this new wave of virus cases.
TD Ameritrade® commentary for educational purposes only. Member SIPC.