Red October

By David Nelson, CFA CMT

After a promising start, October ended in the red on the heels of a Washington failure to deliver a fiscal stimulus embraced by both economists and Federal Reserve Chair Jay Powell. A record 33% GDP print for the third quarter doesn’t mask the fact that despite a significant economic recovery underway, America needs another bridge loan. We still have too many unemployed and even more underemployed as some companies are forced to lay off part of their work force. Close proximity businesses are still at risk especially considering some State and local government decisions to reverse course and reimpose restrictions. Here in my hometown Stamford they have decided to roll back from phase 3 to phase 2.

For the week renewed shutdowns in Europe on the heels of rising COVID-19 cases both here and abroad added to the concern. 4 of the 5 largest companies on the planet including Microsoft (MSFT), Apple (AAPL), Amazon (AMZN) and Facebook (FB) failed to excite investors, all ending lower following their reports. Only Alphabet (GOOGL) managed to put in a positive return for the week.

Oh yes, I failed to mention a little thing called the election just a day away. Regardless of which side of the political spectrum you reside most agree this will be the most divisive in a generation with many concerned a contested election could sow the seeds for increased volatility and even social unrest.

Glass Half Empty

The above of course paints a picture of a glass half empty but as I pointed out last week, we’re still looking at 24% earnings growth for next year. With the risk-free rate essentially zero and a U.S. 10 year offering just 85 basis points stocks offer more including a dividend yield close to 1.7%.

Of course, 24% earnings growth is only achievable if we continue down a path to re-open. If we’re forced to shut down the economy, then the timing of a vaccine and stimulus become critical to sustain economic activity.

Investing for Growth

While Americans care about politics and elections in the long run stocks care about cash flow, earnings, dividends, and revenue in that order. One of the bright spots of corporate activity is laid out in a recent research piece by Goldman’s David Kostin. Even in an uncertain economic backdrop companies are setting up to invest more into the growth of the business and are on track to waste less capital on needless buybacks. Yours truly, has pointed out in previous posts that buybacks are nothing more than an easy way for CEOs to goose the bottom line and make stock-based compensation targets.

The Gold Triangle

After back to back monthly declines the S&P is just above support but living above the all-important 200 day moving average. Some asset classes like bonds increasingly seem at risk with even Gold showing signs of fatigue. The descending triangle pattern looks like it is setting up for a breakdown surprising given a Fed balance sheet that has risen $3Trillion just this year along with massive fiscal stimulus that looks to get even bigger.

We are more than 2/3rds through earnings season with positive surprises coming in well-above average. We have a full plate this week of economic data along with still many companies to report but with the election just a day away markets will be hostage to the Election and the news cycle that follows.

*At the time of this article some funds managed by David were long AMZN, AAPL, MSFT and FB