Following a sharp selloff heading into election week on elevated uncertainty and rising Covid-19 cases, U.S. equity markets staged a blistering rally last week that more than recovered the prior week’s losses as market participants sought to position portfolios for the outcome of the elections and bets for heightened volatility around the election unwound and lifted markets higher. For the week, the S&P 500 surged 7.4%, erasing the prior week’s -5.6% loss, while the Nasdaq Composite and Dow Jones gained 9.1% and 6.9%, respectively. Although the results are not yet certified, the market’s positive reaction showed optimism to the potential for a Biden presidency and a divided Congress that could prove supportive of maintaining a favorable tax and regulatory environment. However, the control of the Senate will come down to a runoff election for two seats in Georgia in January. If Democrats take both seats, the Senate will effectively be split 50-50 between Republicans and Democrats with the tie-breaking vote going to the Vice President.

 

The positive market momentum has carried into this week’s early trading following a very encouraging announcement from the Pfizer and BioNTech partnership noting that their vaccine candidate proved more than 90% effective in the first interim analysis of their Phase 3 trial. In response, the 10-year Treasury yield lifted to 0.95%, its highest point since March, on greater optimism for economic growth. However, not all stocks had a positive reaction as the news sparked a significant rotation out of high-growth tech stocks that have outperformed this year in favor of cyclical stocks leveraged to the economic recovery. For Monday alone, the tech heavy Nasdaq Composite sank -1.5% while the Dow Jones gained nearly 3.0% due to its higher exposure to economically sensitive sectors like the financial and industrial sectors. Despite the encouraging results, obstacles still remain in scaling manufacturing of the vaccine and providing sufficient storage and distribution as the vaccine must be kept at ultra-cold temperatures.

 

With the election and coronavirus developments grabbing most of the attention over the last week, important economic and corporate earnings reports were overshadowed, including the monthly update on the employment situation. Friday’s job report showed continued healing in the labor market in October as nonfarm payrolls rose by 638,000 and the unemployment rate dropped by 1% to 6.9%, exceeding the forecast for a 7.7% reading. Additionally, permanent job losses that have been on the rise in recent months showed signs of potentially plateauing as they stayed constant at about 3.7 million from September to October. Permanent job losses are still 2.4 million higher than in February and these losses will take longer to reabsorb into the economy, but the plateau is encouraging. We will continue to watch this metric closely as the weather turns colder and capacity in certain service industries, like restaurants, becomes more constrained.

 

On the corporate earnings front, over 90% of S&P 500 companies have already reported 3Q results. Of these, over 84% of them reported a positive earnings per share surprise, according to Factset.  If this carries through the remainder of earnings season, it will mark the highest percentage of upside surprises for S&P 500 companies since Factset began tracking the measure in 2008. Suffice to say, the bounce back in economic activity and corporate earnings to date has far exceeded expectations.

 

In the week ahead, as the inflow of quarterly earnings results begins to slow, market participants will continue to monitor progress on stimulus negotiations with the prospects for a deal continuing to be pushed out. A large divide remains in Congress where Senate Republicans are aiming for a bill totaling about $500 million and House Democrats insist on a bill worth at least $2 trillion, and continued uncertainty around the presidential and Senate elections further complicates the negotiations.

 

To help you navigate the shifting market and economic landscape amid election uncertainty and the continued challenges from the pandemic, First Merchants Private Wealth Advisors will be hosting a live, online event on Tuesday, December 1st from 3 to 3:45 pm. You should receive a separate email invitation titled “Perspective from Private Wealth” with the call details, but please reach out to your advisor with any questions that you may have for joining the event.