U.S. equities turned lower last week after three weeks of consecutive gains as market participants sounded a more cautious tone amid the continued rise in Covid-19 cases globally and uncertainty around stimulus negotiations and the upcoming U.S. elections. The uncertainty overshadowed generally positive corporate earnings results and economic data including a strong weekly employment report. For the week, the S&P 500 lost -0.5% while the Dow Jones and Nasdaq Composite each fell about -1.0%. Within the S&P 500, the information technology sector logged the worst returns with a -2.2% loss on the week as an uptick in interest rates weighed on the valuations of companies with high future earnings growth expectations. The 10-year Treasury yield rose to 0.84% from 0.74% in the week prior due to the improving economic data and optimism around the potential for a stimulus deal to eventually materialize post-election, which would result in more government debt issuance and provide a further boost to growth.

 

Last week, World Health Organization director Dr. Tedros Adhanom Ghebreyesus told a virtual World Health Summit that the northern hemisphere is facing a “dangerous moment” amid a resurgence in new Covid-19 cases in several countries with the U.S. hitting a new record of 68,767 cases daily on average over the past seven days and hospitalizations rising. The resurgence poses an obstacle to the recovery of many service sector businesses, where financial resources are increasingly strained. In response to the rising case count, several countries in Europe, including Spain and Italy, have increased social distancing restrictions, though investors still see limited potential for more broad economic lockdowns like earlier this year and have noted optimism on the progress toward a vaccine. 

 

Despite setbacks from new waves of coronavirus infections and fading stimulus support, the U.S. economic recovery has continued to chug along driven by a resilient U.S. consumer. Last week’s unemployment claims data confirmed continued progress on this front as continuing unemployment insurance claims dropped to 8.4 million from 9.4 million in the week prior, far exceeding expectations for an increase to over 10 million, and new initial claims dropped to 787k from 842k a week ago. As a result of the continued strong economic recovery momentum off April’s lows, economists are forecasting a substantial improvement in the preliminary third quarter GDP report due out this Thursday with the consensus estimate sitting at a 30.8% annualized growth rate over the second quarter when economic output fell -31.4%. Despite the third quarter surge, that forecast would place economic output down about -3.5% compared to the third quarter of 2019.

 

As market participants await next Tuesday’s presidential election, the week ahead will be chock-full of economic data and corporate earnings results as more than a third of the S&P 500 is on the docket to report earnings, including all of the tech giants and several major pharmaceutical firms working toward Covid-19 vaccines. So far in the third quarter earnings season, companies have soundly beat expectations overall with the S&P 500 on track for a -15.9% drop in earnings versus the third quarter of 2019 compared to forecasts for a drop of over -21% one month ago. There is no shortage of potentially market-moving events and reports in the coming weeks, but we are encouraged by the fundamental underlying strength of U.S. economic resilience in the face of setbacks and we recommend maintaining a focus on the long-term perspective as equity markets have historically performed well as uncertainty subsides.