The S&P posted its best weekly performance in three months while the NASDAQ composite rose by 5% in a week that saw the daily Covid-19 cases around the world top 350,000 (a new record) as a second wave takes hold across major regions.
The U.S. markets were primarily driven once again by the on-again, off-again negotiations over additional fiscal stimulus in the U.S.
The political back-and-forth reached obscene levels this week. Despite a more positive outlook last week, markets pulled back sharply as President Trump tweeted that the economy was “doing really well’ and that he had “instructed my representative to stop negotiations until after the election.” This was then followed by a swift reversal of sorts a couple of hours later as he tweeted about fiscal support for airlines, small businesses, and direct payments for individuals of $1,200. Stocks rallied on Wednesday as a result.
Trump’s seemingly rapid recovery following his CoVID-19 diagnosis also provided some hope for new antiviral treatment. He promised that the antiviral treatment he received would soon be free and widely available to Americans, a bold claim that medical and scientific experts have questioned.
The small-cap Russell 2000 Index surged over 6%, pulling it out of correction territory as it outperformed the broader market by a wide margin for the second week in a row.
A more risk-on narrative in the market pushed yields to four-month highs this week, allowing the 10-Year Treasury yield to break out of its sub 0.7% range. Trump’s quick recovery removed some election uncertainty, while Joe Biden’s lead in the pools offers the potential for a larger relief package in 2021.
The safe-haven dollar nursed some losses this week after the revival of hopes for some U.S. fiscal stimulus improved investor sentiment and appetite for riskier currencies.
Last week’s bruising week for oil stocks is but a distant memory. U.S. Crude oil prices surged nearly 10%, climbing above $40 a barrel, recovering all of last week’s losses after the OPEC Secretary-General claimed that “the worst is over” for oil producers.
The struggle between Main Street and Wall Street continues to play out and has now been synopsised in the formation of a K-shaped economic recovery. Simply put, a K-shaped recovery will see different parts of the economy recover at different rates. The well position tech and communication services will continue to lead the way, capitalising from social distancing provision. In contrast, industries such as hotels, airlines, and restaurants still plagued by weaker demand continue to suffer. This ever-increasing sector-specific recovery rate is likely to be highlighted once again in the upcoming Q3 earnings season. As the virus persists, targeted fiscal support for those at the bottom of the ‘K’ becomes vital to these businesses’ survival. Any failure to implement support for those industries that need it most will see a reversal of the progress made in unemployment figures since April.
Q3 earnings season kicks off this week. A historically low expectation hurdle in Q2 resulted in a record 25% positive earnings surprise, which helped push stocks higher as many companies greatly exceeded the low expectations set. While the same dramatical levels of earnings surprise is unlikely, continued earnings improvements from current levels are expected in Q3 and beyond.