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Weekly Optimism Dose: Stimulus Hopes Rise Ahead of Election as Street Braces for Earnings Flood

Our chief market strategist breaks down the day's top business stories and offers insight on how they might impact your trading and investing.

https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Airlines: Rally ahead of stimulus
5 min read
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Key Takeaways

  • Crowded earnings week begins with IBM, Halliburton in spotlight today

  • Fiscal stimulus hopes improve after some progress made over weekend

  • Fed’s Powell, Clarida both speak this morning, and 10-year yield up again

(Monday Market Open) It’s around the market in 80 earnings reports this week.

While the flood of corporate results normally would soak up most of the attention, fiscal stimulus hopes pushed to the front of the line this morning. Things start with a firmer tone after weekend talks appeared to make progress, but we’ve heard this story before. People might be skeptical until something more solid is on the table. 

It isn’t too surprising that stimulus talks are coming down to the wire here two weeks before the election. That’s the timeframe when the market’s focus is likely to turn more toward the vote. You might want to start watching some sectors to see if more money moves around the next couple of weeks as the vote gets closer and people take its potential market impact more seriously. Sectors to watch for possible election-related moves include Financials, Health Care, and Energy. 

The approaching election—along with rising covid cases—could be one reason volatility ticked a little higher early Monday even as stock indices rose in pre-market trading. A lot of the time, a rise in volatility accompanying a rise in stocks can signal that either one or the other is due to get pulled back. 

The earnings tsunami starts today with IBM (IBM), Halliburton (HAL). Seventy-eight other companies join the reporting frenzy before Friday night. And this isn’t even the most crowded earnings week by volume. That’s a bit later this month. 

Also on tap: Lots of Fed talk, opening right now as Fed Chairman Jerome Powell participates in a discussion at the International Monetary Fund (IMF) meeting. That’s followed by Vice Chair Richard H. Clarida delivering a speech called, “U.S. Economic Outlook and Monetary Policy” at the American Bankers Association Convention. All virtually, of course. 

There’s news from overseas to start the week, too. China’s economy grew 4.9% in Q3. Normally that wouldn’t be cause for celebration when you consider average growth in China was above 6% until this year for years and years. Also, the figure is just below analysts’ expectations. Still, growth for 2020 is now in positive territory at 0.7%, not a bad showing considering the way this year’s gone for China and the world. 

Wondering when we’ll get a look at U.S. Q3 gross domestic product? It’s due a week from Thursday, and hopefully looks better than the -31% nosedive of Q2.

Earnings Pace Starts to Pick Up with Tesla, Netflix Among Big Names

We’re getting into the heart of earnings. This week’s calendar looks like a who’s who of the S&P 500, featuring a wide mix of firms including Lockheed Martin (LMT), AT&T (T), CocaCola (KO), Phillip Morris (PM), Tesla (TSLA), Abbott Labs (ABT), Verizon (VZ), Intel (INTC), and our first FAANG sighting of the season with Netflix (NFLX).

By the end of the week, investors should have a far better picture of how reporting season is going. Next week is another crowded schedule, though. 

The FAANG fun begins tomorrow with NFLX. Some Wall Street analysts worry the streaming company’s new release pipeline might be drying up, along with the hefty subscriber growth NFLX enjoyed earlier this year as the pandemic took hold. Others are optimistic heading in, saying NFLX continues to reap benefits from the stay-at-home economy even as it faces some challenges. 

Investors normally keep a close eye on subscriber growth, and this quarter is no different. As of the end of the Q2, NFLX’s total global subscriber base sat north of 192 million, some 73 million of which were from the U.S. For Q3, NFLX previously issued new subscriber guidance of 2.5 million. So that’s the number to beat. 

While we’re talking corporate news, General Electric (GE) ended up having a big day Friday thanks in part to media reports that Europe’s aviation regulator said Boeing’s (BA) 737 Max aircraft is safe to fly again. GE is a big supplier of BA’s, so this move offered a good lesson on how important it is to pay attention to market relationships.

For the week ended Friday, Tech stocks gained some traction as the Nasdaq 100 (NDX) finished up 1%, but the SPX barely moved. The small-cap Russell 2000 (RUT) fell back on Friday after showing some life mid-week. There’s a chance RUT could be a good election barometer, as some investors think domestic companies (widely represented by the index) would possibly take less of a hit than big multinationals from any kind of new corporate tax regime. Stay tuned. 

In data last week, inflation looked unremarkable while retail sales turned into a bright spot. Key numbers to watch in coming days include September housing starts and building permits tomorrow morning, along with initial weekly jobless claims and existing home sales on Thursday. 

Analysts look for housing starts tomorrow at a seasonally-adjusted annual rate of 1.43 million, according to research firm Briefing.com. That’s just above August’s 1.42 million. Building permits are seen coming in at 1.51 million, again just a touch beyond the 1.48 million in August. Record low mortgage rates and people moving out of cities during the pandemic both formed tailwinds for housing last summer, so we’ll see if it held up as fall approached. 

Momentum Lost

Friday’s early exuberance ended with a whimper as the S&P 500 Index (SPX) barely finished higher and the Nasdaq (COMP) surrendered gains to close lower. That doesn’t necessarily give things much momentum headed into the new week. Neither does rising worry about coronavirus as caseloads grow in Europe and the U.S. Concerns about this could potentially cap any big rally chances this week. 

The last minute pullback Friday in Tech stocks, which make up a big chunk of the COMP, put a cloud over what might have been a nice finish to a rough week. There wasn’t much in the way of news that could explain the late weakness, so some analysts attributed it to options expiration. 

A slide in the SPX late Friday to below 3500 might have triggered some technical selling, according to research firm Briefing.com. Obviously, that’s a psychological level for the index and it’s had trouble staying above it on a few attempts now (see chart below).

CHART OF THE DAY: IS SPX GETTING SHY? Twice since August, the S&P 500 Index (SPX—candlestick) has tested the waters above 3500. The latest occasion was Friday, when it abruptly pulled back to finish below that level. Any signs of it being able to get above and stay above 3500 might be seen as technically positive, while support on any retreat could be gathering near the 50-day moving average (blue line) at around 3400. Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade.For illustrative purposes only. Past performance does not guarantee future results.  

Thin Air Above? If there’s one thing we learned last week, it might be that attempts to reach all-time highs are going to face challenges despite some investors buying on retreats. The SPX rose above 3500 early last week for the first time since the start of September and flirted with the all-time high close of 3580, but found little buying interest up at the heights and quickly retreated. Some analysts said valuation fears remain a barrier at those levels. On Friday the SPX again climbed to heights above 3500, only to fall back by the last hour. 

Disappointment about lack of fiscal stimulus might also have played a big role in last week’s pullback that featured three straight lower days, but profit-taking and options expiration also could have been a reason.

With so much election and pandemic volatility in the mix, it seems more likely that the SPX and other major indices might remain range-bound the next week or two rather than pushing for any new records. Of course, the markets have a way of surprising us, and, as they say, stocks “climb a wall of worries.” 

Yields Up to Start Week, But Rally Faces Challenge: After probing heights near 0.8% and depths near 0.7% last week, the benchmark 10-year Treasury yield seemed like it was trying to please bulls and bears alike, closing Friday near the middle of that narrow range. By Monday morning, the yield had jumped to 0.78% as stimulus hopes revived, but this is a story we’ve seen play out before without a conclusive move to higher levels. For now, this move where we see yields hanging out mainly between 0.76% and 0.77% compared with the long stretch where it was more like 0.66% to 0.67% seems to be helping the Financial sector a bit. 

One problem for anyone hoping yields will rise is that European rates keep falling, possibly making U.S. Treasury notes more attractive to overseas investors even at today’s bargain-basement rates. Any rally in yields here has to fight the tumbling yields in places like Germany, meaning the Treasury market might not be the best reflection of U.S. economic prospects, at least for now. 

Despite Weak Claims Data, Americans Go Shopping: Looking back for a minute at last week’s initial unemployment claims report, no one wants to see those numbers go up the way they did on Thursday when they jumped to 898,000. It’s probably fair to say that everyone hopes the economy can quickly recover and people can get fully back to work. 

Having said that, it’s also important for investors not to get too high or too low based on any one week of data unless there’s a giant miss or a big gain. It’s a bit disappointing to see the average number starting to flatten, however, and could mean the market facing a disappointing October payrolls report in a few weeks. 

Another interesting thing: This recent high-level flattening of initial claims between 800,000 and 900,000 a week (tripling the pre-pandemic rate) didn’t seem to push down consumer spending. At least that could be a takeaway from the big jump in September retail sales Friday. Spending on vehicles, sporting goods, and home-improvement stores could be a nice preview of next month’s retail earnings season. It looks like people’s eagerness to do home projects—which helped companies like Lowe’s (LOW) and Home Depot (HD) in recent quarters—is still going strong.

Good Trading,

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This week’s economic calendar. Source: Briefing.com

Key Takeaways

  • Crowded earnings week begins with IBM, Halliburton in spotlight today

  • Fiscal stimulus hopes improve after some progress made over weekend

  • Fed’s Powell, Clarida both speak this morning, and 10-year yield up again

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