Stocks, Stimulus Hopes Drift Lower

Friday, October 23, 2020 4:28 PM | Bobby Raines

Oct. 23, 2020 - Stocks lost ground this week, but what is probably more noteworthy than the direction of the move is the relative calm in the market for most of the week.

As we've seen some number of times recently, the biggest catalyst for the market right now is a new stimulus bill. While negotiations are, reportedly, still happening, it is starting to seem doubtful that the White House and House of Representatives will be able to reach an agreement before the election, while it seems even more unlikely that the Senate has any interest in considering any agreement that might be made.

That the market's reaction to the increasingly dim chances of a deal has been muted is likely due to the steady stream of positive headlines about progress, even as analysts increasingly discount the likelihood of a deal. The market tends to have a sharp reaction to the sudden introduction of new information, but a less severe reaction when individual market participants reach the same conclusion over a longer period of time.

Meanwhile, earnings news is decidedly mixed. While many companies are beating estimates handily, that story is about low estimates more than high earnings. Earnings are down considerably from last year's third quarter, and most companies and analysts don't expect them to show year-over-year growth until the first quarter, which was itself a quarter where earnings declined year-over-year in part due to the coronavirus pandemic.

Economic News

The biggest economic news this week was the Purchasing Managers Index for October. The report showed a better-than-expected expansion, particularly in the services sector, but there are hints of some softening in the report as well. IHS Markit, the firm that compiles the data and publishes the report noted that the rate of growth slowed in October across the economy.

In manufacturing, the rate of new orders slowed, while activity increased. This means companies were able to shrink their backlog of orders, but those two measures can't stay unbalanced for long. Either orders need to increase or activity will decrease, which likely means a decrease in employment. The report did note that some activity has been delayed due to uncertainty around the election. Election-related uncertainty is interesting as it implies business decision makers view some outcomes as less favorable, or even more unfavorable than others. Which outcomes are more or less favorable probably vary by industry, so it's likely that some of those delayed orders will be made regardless of the outcome.

Some slowing in the rate of increase was to be expected given how fast economic activity went down and then back up, but as we're nowhere near the economy's full capacity, it is a bit disappointing to see the pace of the recovery slowing already.

The market seems likely to remain muted through the election, unless there is actually a stimulus deal, which could help push things back to new highs.

All told this week, the S&P 500 lost 0.53%, the Nasdaq slid 1.06% and the Dow Jones Industrial Average fell 0.95%.

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