U.S. equities tumbled lower last week to close out October with the worst weekly drop since March driven by the continued rise in Covid-19 case counts around the world and the resulting increase in mitigation efforts as well as the heightened political uncertainty ahead of this week’s U.S. elections. As daily new Covid-19 cases in the U.S. have ticked up over 80k on average over the last seven days, several northeastern states have reintroduced restrictions to slow the spread. Meanwhile several European countries, including France, the U.K., and Germany, have reinitiated broader lockdown measures to tamp down the resurgence. Once again, the virus and political uncertainty overshadowed a sustained flow of stronger than anticipated corporate earnings results and economic news, including a robust initial reading of third quarter GDP growth. For the week, the S&P 500 slumped lower by -5.6%, while the Dow and Nasdaq Composite sold off by -6.5% and -5.5%, respectively. Generally strong sales and earnings beats from U.S. tech heavyweights weren’t enough to meet the high expectations priced into their stocks, which put additional pressure on U.S. equity markets given their large index weightings. Meanwhile, U.S. Treasury bonds didn’t offer shelter from the volatility as bond prices dropped and yields climbed with expectations that the market will have to absorb a greater influx of government debt to fund stimulus and other spending.

 

Corporate earnings results for the third quarter have broadly leapt over the low bar that was set for them. With two thirds of the S&P 500 having announced earnings to date, companies are reporting earnings over 19% above expectations compared to the 5-year positive surprise average of 5.6% over the consensus forecast, according to FactSet. Overall, the index is on track for less than a 10% drop in earnings compared to the third quarter of 2019, which is a stark improvement over expectations for a drop of over 21% a month ago. Companies leveraged to at-home trends have unsurprisingly posted some of the best results but industrial companies and consumer discretionary companies, including auto manufacturers and apparel makers, have actually reported the greatest positive surprises.

 

U.S. economic data continues to demonstrate a firming foundation beneath the corporate earnings recovery. Last week’s first preliminary look at third quarter economic output reported an annualized growth rate of 33.1% over the second quarter’s bleak results. That reading places U.S. economic output down -2.9% compared to the third quarter of 2019. The underlying breakdown of the growth was particularly encouraging as domestic consumption and private business investment provided the greatest contributions, while foreign trade was the only negative component as a relatively weaker recovery outside the U.S. hurt exports. The October ISM manufacturing survey further confirmed this strength with manufacturing activity reaching its highest point in two years as manufacturers restocked depleted inventories and responded to strong consumer demand.

 

The presidential and congressional elections will certainly be front of mind this week, though there are a host of other significant events on the docket as well including another big week for corporate earnings, with a quarter of S&P 500 companies set to report. The Federal Reserve will also be in focus following their monthly meeting on Thursday. Economists don’t anticipate any notable changes from the central bank, but the Fed may review plans to provide additional economic support such as a shift to buying more long-dated Treasuries, thereby keeping a lid on long-term rates. The same day, the Bank of England may introduce new stimulus measures in the face of lockdown restrictions and the looming completion of the Brexit transition period at the end of this year. Finally, the week will be closed out with the U.S. jobs report on Friday that is expected to show a gain of 580k jobs in October, the fourth consecutive month of slowing growth in payrolls, which remain more than 10 million lower than before the pandemic. Despite the bevy of information and developments set for the coming weeks, it is important to stay the course and maintain a long-term perspective where possible. Our team at First Merchants Private Wealth Advisors is always available and happy to help you navigate these uncertain times, and we will keep you apprised of market developments and our thoughts in the weeks ahead.