A pedestrian outside the New York Stock Exchange in New York, July 29, 2020.
Wang Ying | Xinhua News Agency | Getty Images
The market story in October is really complicated.
If you thought September was confusing, October probably isn't any better and could be a lot rockier.
That's because the "buckets" that have moved the markets on different days over the past few months are all potentially at play:
Elections: Uncertainty about whether there will be a winner on election night and President Donald Trump has signaled that he may be ready to question the results. Stimulus: Can we get a final deal between Nancy Pelosi and Steven Mnuchin? Markets moved lower on Wednesday when no deal was announced, so traders are still worried. Revival: Better economic data this week (consumer confidence, Chicago PMI, ADP payrolls, home sales pending) must be weighed against an increasing number of layoffs (Shell, Dow, Disney, Marathon Petroleum). There will be more layoffs announcements as soon as the wins are announced. Treatment / Vaccine: Will there be Phase 3 study news on the vaccine? China Trade War: Any retaliation from the Chinese is likely to fall on Megacap tech and semiconductor stocks that lead the market Rating: If Apple – the largest stock in the US – is in a trading range of over 20% in a month, know You that dealers are not sure what is going on. Ratings are on the up and down, depending on the reopening prospect and vaccine hopes, none of which will be cleared anytime soon.
All of this should make traders nervous. A lot can go wrong with high ratings.
But there is a surprising amount of optimism, at least in the professional trading community.
"We get better than expected business news almost every day, and I still think it will be," said Jim Paulsen, chief investment strategist at The Leuthold Group. "You have consumers buying. Housing and auto sales are going strong. IPOs are coming back to life."
What about an increase in infections? Paulsen admits that there are concerns that an increase could slow growth in the fourth quarter, so he believes another stimulus package is important to keep markets going. That being said, he offers a novel interpretation of how to look at a fourth quarter spike: "The country will likely be more focused on whether the death rate goes up than the infection rate. both personally and at the corporate level. So I think infections are still important, but the death rate will be far more important. "
More layoffs coming? "It's not good, but look at the job growth. There have probably been fewer than 50,000 announced layoffs so far. Look at the ADP numbers. Over 700,000 jobs."
On valuations, many traders believe the mid-September correction, with the S&P 500 falling about 10% and 15% to 20% on many Megacap tech stocks, was exactly what the market needed.
"Many of the weak hands were shaken out during the mid-September correction," said Alec Young, Tactical Alpha's chief investment officer.
"We're still 200 points below the old high in the S&P," he said. "It may take a while for the market to make a new high, but the risk of not being in the market is higher than the risk of being out of the market. As long as we get a fiscal contract the market will get higher."
One final positive note: at the start of the earnings season, the early reports were almost all positive, and earnings were slowly rising rather than falling.
"There is a lot of uncertainty, but there are so many real analysts and companies will revise their estimates upwards," said Paulsen. "Wall Street will revise not only the fourth quarter, but also the numbers for 2021."
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