Jumping Ship: Profit-Taking Seen As Election Nears, Caseloads Rise, Stimulus Hopes Fade

Key Takeaways:

  • Risk-off sentiment seems to be growing as virus cases rise, stimulus hopes decline
  • Major indices didn’t have a late rebound attempt, possibly bringing pressure tomorrow
  • GDP, weekly claims and four FAANG earnings on the calendar for Thursday

Faced with blazing levels of uncertainty ahead of the election and a virus surge across the U.S. and Europe, investors are voting with their feet.

At least that’s what it looked like Wednesday, the second day this week of major indices plunging and fixed income gaining ground. The S&P 500 Index (SPX) fell 3.5%, and volatility soared. The Cboe Volatility Index (VIX) climbed above 40 for the first time since June 15.

Worse, perhaps, is that the major indices all stumbled into the close and finished near their session lows as no sector escaped the carnage. The late move lower doesn’t exactly bode well for Thursday.

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Many investors have enjoyed a good run the last six months or so and appear to feel like taking profits and risk off the table until after the election is resolved. That might be a longer process than usual and may not get done next Tuesday, which is something you have to keep in mind.

At the same time, virus counts and, perhaps more significantly, hospitalization rates are up across the U.S., and traders have been keeping their eye on that statistic as something to be concerned about. VIX had its biggest one-day advance in a long while.

Stimulus Hopes on Vacation

The “risk-off” sentiment that started percolating last week accelerated as this week continued and hopes for more government stimulus came off the table. Stimulus basically left town when Congress and the White House couldn’t get it done last week, because now everyone’s waiting for the election.

It’s unlikely the lame-duck Congress can get anything done, which means we might be looking toward February before something happens. The new Congress gets seated in early January, but in those first few weeks many of them will still be figuring out what hallways to go down, so it’s hard to believe anything gets done right away.

In this environment, not many people seem anxious to take on new risk. It’s even possible this risk-off dynamic could last until the end of the year. The fact that we’re in the heart of earnings season doesn’t seem to be making much difference. Earnings news is being overwhelmed by outside news.

One thing that really summed up the mood on Wall Street Wednesday was hearing people talk about a $7 stock, General Electric (GE), as the bright light of the market thanks to stronger than expected earnings. Nothing against GE, of course, but it’s a $67 billion market cap company and no longer has the influence it once did. It was nice to see shares of GE rise 7% considering all the challenges it’s faced.

Aside from GE, pain spread pretty thoroughly around the market as every S&P sector fell 1.9% or more. All of the FAANGs that report tomorrow—meaning everyone except Netflix NFLX (NFLX)—were down 3% to 5% by afternoon. Not exactly the way you want to go into reporting day. Some of the pressure might have reflected regulatory issues, with Alphabet (GOOGL), Facebook (FB) and Twitter (TWTR) getting slammed by senators from both parties in a hearing on Capitol Hill Wednesday, according to media reports.

So-called “reopening” stocks also ended up on the discount rack Wednesday. Major cruise line companies, airlines, Boeing BA (BA), and casinos all hit the dirt. Unlike Monday when more of the “stay at home” stocks managed to avoid the worst, only Peloton (PTON) was keeping its head above water late in Wednesday’s session. Even Zoom (ZM), a recent favorite of the “stay at home” crowd, pulled back despite more U.S. states, including Illinois, gradually tightening their shutdowns.

The SPX, Dow Jones Industrial Average ($DJI), and Nasdaq NDAQ (COMP) all ended down more than 3%, and the Russell 2000 Index (RUT) of small caps only did a little better, falling 2.5%. VIX ended above 40.

Weakness Takes Extended Tour: Commodities and Overseas Markets

Crude oil, as you might expect, got hammered. U.S. prices fell more than 5% to below $38 a barrel, hurt by virus caseloads and a higher than expected weekly supply build. As noted here Monday, there’s not a lot of chart support for crude until it gets down to around $36.

Copper—which like crude is seen as a good barometer of the world’s economic health since it’s used in so many industrial applications—is down pretty sharply from recent highs.

Softness in both copper and crude reflect worries about the U.S. economy and also Europe, where caseloads are rebounding, too. France and Germany are instituting new shutdowns, and it’s getting kind of crowded out there at the woodshed. Germany’s blue-chip DAX index fell more than 4% and France’s CAC slid 3.5%.

Stocks rose in China earlier Wednesday, but consider keeping an eye on Shanghai overnight to see if the U.S. and European downturns start to spill over. China recorded decent year-over-year GDP growth in Q3, something probably out of reach for the U.S. and Europe, analysts believe.

Investors Hop Out of Stocks, Into Bonds and Cash

As investors scurried out of equities, some of the money appeared to go into fixed income. The 10-year yield—which moves opposite of the underlying Treasury note—dropped to 0.75% at times on Wednesday, down about 10 basis points from last week’s high. The yield on the 30-year Treasury bond dipped down to 1.54%, threatening the 1.5% level for the first time since early this month.

With Treasury yields so low, dividend-yielding stock sectors have been rebounding. Utilities, for instance, is the best-performing sector of the last month, up more than 10%. Its losses Wednesday were fourth lowest on Wall Street, behind Real Estate, Financials, and Materials.

Meanwhile, gold continued to sink. That might seem unusual in these uncertain times, but it could reflect more strength in the dollar index. The dollar traded above 93.5 at times on Wednesday, up from 92.75 last week. This might reflect some investors fleeing to what they see as a “safe haven” in cash.

As an investor at this juncture, it’s important not to try and be a hero. There’s little point trying to guess and position yourself for a Biden victory or a Trump victory. The important thing is to look beyond that to where the fundamentals might go when the dust settles and adapt accordingly.

Resilience, Despite the Headline Worries

Despite all the bad news around the virus and lack of stimulus, there is positive news if you look for it. The country seems better equipped to get through any shutdowns from a supply chain standpoint, meaning toilet paper shortages appear unlikely. Companies have found ways to adapt. Also, about half of the jobs initially lost last spring have come back.

Better treatments are out there for the virus, so investors should consider keeping an eye not just on hospitalizations but also on deaths. So far, the death rate hasn’t been keeping up with cases and hospitalizations, but it is a lagging indicator. Hopefully we won’t have the same kind of suffering as we did in earlier waves.

The Technical Standpoint

Technically, the major indices are approaching some interesting levels as the Dow Jones Industrial Average ($DJI) fell below 27,000 and the SPX fell below 3300 on Wednesday. The $DJI has been in a stair-step pattern since last spring, with the steps at roughly 24,000, 26,000, and 28,000, while the SPX has spent a lot of time between 3300 and 3500.

With the $DJI now below 27,000 again, that 26,000 stair step comes into view, and that would represent a 10% correction. For the SPX, 3200 might be an important support level to watch now that 3300 has been breached. The 100-day moving average for the SPX stood at 3306 going into Wednesday’s session. That’s been taken out, but the more meaningful 200-day remains well below the market at 3129 (see chart below).

The 3129 level is particularly interesting because it lines up almost exactly with the year-to-date SPX average of 3135. If there’s more uncertainty and risk-off action in coming days, that support level could be pretty important.

It’s also possibly significant that unlike on Monday when indices made recovery efforts in the final minutes, that didn’t really happen Wednesday. Instead, the SPX traded near its low for the day in the last 10 minutes of Wednesday’s session. Sometimes a late recovery can carry into the next day, but the way Wednesday ended doesn’t give a lot of hope for Thursday’s open.

A Look Ahead

Tomorrow’s a big day. Four of the five FAANG companies, including Apple AAPL (AAPL), GOOGL, FB, and Amazon AMZN (AMZN) report after Thursday’s close. We’ll have more insight in tomorrow morning’s Market Update on what to expect and what to watch for with each.

Also, tomorrow morning brings the government’s first look at Q3 gross domestic product. There’s likely to be a big rebound from Q2’s worse than 31% GDP losses, analysts say. The average guess on Wall Street is 30.2% growth on an annualized basis, according to research firm Briefing.com. That’s vs. a very easy comparison from Q2, however. When taken as a whole, it’s a nice rebound, but tepid relative to the pre-Covid period.

Weekly initial unemployment claims are the other big one to wait for tomorrow morning after last week’s better than expected 787,000. Analysts expect a headline number of 763,000 in tomorrow’s report.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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