- Weekly market focus
- Pandemic surge is leading to tighter restrictions in many states
- Prospects continue to look dim for large stimulus bill during lame-duck but some help is possible in spending bill
- Q3 earnings season winds down
Weekly market focus — The U.S. markets this week will focus on (1) the pandemic surge and the extent to which new restrictions will hurt the U.S. economy, along with any positive vaccine news, (2) political uncertainty as the markets wait for the presidential election results to be finalized and for the two run-off elections on Jan 5 for the Georgia Senate seats, (3) speculation about the policy and regulatory direction by President-Elect Biden and who he will pick for key economic posts such as Treasury Secretary, (4) the tail end of Q3 earnings season with reports from 12 of the S&P 500 companies, (5) the Treasury’s auction of 20-year T-bonds on Wednesday and 10-year TIPS on Thursday, and (6) a busy U.S. economic calendar with key reports including Tuesday’s Oct retail sales (expected +0.5% after Sep’s +1.9%) and Oct industrial production (expected +1.0%), Wednesday’s Oct housing starts report (expected +2.8%) and Thursday’s Oct existing home sales report (expected -1.4%).
In Europe, the markets are focused on Brexit as negotiations are expected to continue this week. ECB President Lagarde, in remarks on every day this week except for Wednesday, may highlight the ECB’s stated intention to expand its stimulus measures at its December meeting.
In China, the markets are waiting for any additional actions by the Trump administration against China after it announced last week that U.S. entities are barred from investing in a list of stocks that the administration says are connected with the Chinese military. Other U.S. actions against China are possible this week.
Pandemic surge is leading to tighter restrictions in many states — The pandemic statistics continue to soar, with new U.S. Covid cases last Friday skipping higher to 190,059. The 7-day average of new U.S. Covid cases is at a record of about 170,000, according to Johns Hopkins. The sharp rise in Covid cases is putting pressure on state and local governments to impose more restrictions as hospitals get near, or reach, capacity.
The markets are now more optimistic that an effective vaccine is on the horizon after news last Monday of the 90% efficacy for Pfizer’s vaccine. Moderna is expected to announce the interim results within a matter of days from its Stage 3 trial, which are expected to be similar to Pfizer’s positive results.
Prospects continue to look dim for large stimulus bill during lame-duck but some help is possible in spending bill — Congress will be back in full swing this week for their lame-duck session as House members return to Washington early this week from their election break. The Senate was already back in session last week.
The chances continue to look dim for a large stimulus bill during the lame-duck session. With the Trump administration stepping back from the stimulus negotiations, any stimulus deal would have to be negotiated directly between Speaker Pelosi and Senate Majority Leader McConnell. A Pelosi-McConnell deal seems unlikely since both sides last week restated their highly divergent positions with Mr. McConnell at $500 billion and Ms. Pelosi at $2.4 trillion.
Moreover, Speaker Pelosi has some incentive to delay negotiations into January since there is a small chance that the two Democratic candidates could both win the run-off elections on Jan 5 for the two Georgia Senate seats, thus giving Democrats control of the Senate. However, the betting odds (for whatever they are worth) are currently at 83% that Republicans will keep control of the Senate and only 20% that the Democrats will gain control of the Senate.
Even if Democrats don’t gain control of the Senate from the January 5 Georgia run-offs, Ms. Pelosi may favor waiting on stimulus negotiations until Joe Biden becomes president on January 20. Ms. Pelosi last Friday said she believes the Democrats will have much more power in Washington when Joe Biden becomes president, ignoring the fact that Mr. McConnell has already shown that he is nearly impervious to outside political pressures in pursuing his political objectives. If Mr. McConnell is the Senate Majority Leader in January, then Democrats will likely find it difficult to get a stimulus bill much larger than $1 trillion unless they give Mr. McConnell other things he wants.
However, there is the outside possibility that some stimulus relief could be added to the spending bill that must be passed by December 11 to avoid a government shutdown when the current continuing resolution expires. Ms. Pelosi has opposed any piecemeal passage of stimulus measures, but she may relent during the lame-duck session since the pandemic is worsening substantially and since she knows she will have some political help arriving in January when Joe Biden becomes president.
Q3 earnings season winds down — Q3 earnings season is winding down with reports this week from only 12 of the S&P 500 companies. Notable reports this week include Walmart and Home Depot on Tuesday; Lowe’s, Target, TJX, and Nvidia on Wednesday; and Intuit and Ross Stores on Thursday.
The consensus is for S&P 500 earnings growth in Q3 of -7.4% y/y (-3.2% y/y ex-energy), according to Refinitiv, which is much better than the pre-release consensus (as of Oct 1) of -21.4%. Looking ahead, the consensus is for SPX earnings growth of -11.0% in Q4, leading to an overall earnings decline for 2020 of -15.6%. The consensus is for SPX earnings to then grow by +22.9% in 2021.
