Capital Wealth Planning: Monday Morning Observations – Broken Record

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Monday Morning Observations
BROKEN RECORD

Choppy Week on Wall Street

“Things are neither good nor bad, but thinking makes it so.

-William Shakespeare

Stocks finished a choppy week with slight gains after a better-than-expected retail sales report overshadowed the increasing COVID-19 cases and the lack of fiscal stimulus.

Despite a 3-day mid-week slide, the Dow Jones Industrial Average eked out a 0.1% gain for the week when it closed at 28,606.31 on Friday. The S&P 500 finished at 3,483.81, inching up 0.2% on the week. The NASDAQ advanced 0.8% on the week to end at 11,671.56. This marks a fourth straight weekly advance for the tech-heavy index.

Quite a bit has happened in the market since we last addressed the subject a mere seven days ago – Enough breaking news to overload the senses, and plenty of sublime context for both sides of the political spectrum. If we try to sum it up, here’s the short factual version:

  • Pertaining to the coronavirus, it was a step backwards as Johnson & Johnson had to stop their Phase 3 vaccine clinical trials to do more research on “illnesses” of patients participating on the trials. However, Pfizer announced on Friday that they expect to know if their vaccine candidate, which is being developed in partnership with BioNTech, will be effective by the end of the month. The company hopes to apply for emergency use in late November.
  • On stimulus, no deal yet. Latest range is $1.8 Trillion (Reps) – $2.2 Trillion (Dems). Pretty close, one would think. Markets, however, are pricing this in as a post-election reality.
  • Regarding the Supreme Court nomination, the hearings have ended and the vote is headed to the Senate floor on October 26. We expect it to follow partisan lines.

Given that the last two are political, we’ll withhold comment except to say, with only two weeks left until the election, neither of the last two will move the economic needle in a substantive way to influence the final outcome. The government cannot deliver checks in two weeks, and Justice-to-be Barrett will probably be sworn in but will need time to catch up with the present caseload of Supreme Court deliberations. It’s worth pointing out that her intellect and poise gave us a “civil” hearing, as compared with the vitriolic hearings for Justice Cavanaugh last August.

As to the first bullet point, the War-Speed program does have implications for the economic recovery debate. As we have said from the beginning, it’s not a matter of “if, but when,” we will find a vaccine to fight the pandemic. There are other non-U.S. companies involved in this pursuit, and a number of others in the pharma landscape researching for therapeutic drugs to treat infection. We have to accept the rational conclusion that the race to a year-end announcement of an approved vaccine has shifted to Q1 2021, and distribution in the U.S. likely to be mid-2021 at best.

The implications on the timing of economic recovery are clear – it will take longer to re-open the full economy and restore consumption patterns to pre-shutdown levels. Having reached that conclusion, neither the Fed nor the markets are abandoning expectations of a low to moderate expansion which provides the under-pinning for positive growth.

One way to look back at the May to October 2020 timeframe, and more important, look forward to the year-end horizon is to look at Volatility in chart-form:

Eliminate the outlier numbers, and we can draw a straight line across the chart at a median of 28, which can best be described as a mid-range number, bad enough for the pessimists to “cry wolf,” and good enough for the optimists to deem it a workable number. If one word describes the markets for 2020 it’s “resiliency”, and if one word can be ascribed to the year-end aspirations it’s “doable”. Leaving aside political histrionics about the elections, the market remains focused on data and corporate results to gage the trend-line going forward.

As we start getting corporate results, we continue to assess which sectors of the market have responded past the pandemic lows and which have not. But even the battered discretionary spending sector remains viable, not broken. Take United Airlines (UAL) for example. They announced a dismal loss last week of -$1.8Billion for Q3, but who would expect a profit for airlines and cruise ships in the midst of a pandemic. It will take time to restore public confidence, but we are not going to stop flying and cruising.

We continue to subscribe to a steady strategy focused on high-quality, earmarking those companies that continue to grow their balance sheets with organic growth, and sustain reasonable dividend payouts in spite of restricted cash flows from a recuperating, but still impacted, average consumer.

As we have stated in recent commentaries, “it’s a matter of time” – time to a vaccine, time to a fiscal stimulus package, time to a fully functional Judicial branch , and time to a duly elected Legislative and Executive Government. Once we get over these time hurdles, we can look forward past the recovery phase and onward to a sustainable economic growth phase

Give me free markets, and this remains a land of opportunity with a positive outlook!

Market Update:

  • Oil Prices – West Texas Intermediate crude increased for a second straight week to close at $40.88 per barrel.
  • Gold – Gold experienced its first weekly decline in three weeks, slipping to $1,906.40 an ounce.
  • U.S. Dollar – U.S. dollar recorded a weekly gain of 0.7%.
  • U.S. Treasury Rates – The yield on the benchmark 10-year ended the week at 0.74%.
  • Asian shares were mixed in overnight trading.
  • European markets are trading mostly lower.
  • Domestic markets are indicated to open in the green this morning.

Like a broken record, Wall Street will focus its attention squarely on Washington again this week. The negotiations in Congress regarding another aid package will continue to dominate the headlines.

Stimulus talks won’t be the only talking point as third quarter earnings season rolls on with a whole host of big names reporting. Highlights include: IBM, Proctor & Gamble, Netflix, UBS, Verizon, AT&T, Kimberly-Clark, Fifth Third, Union Pacific and American Airlines.

As we touched on last week, corporate earnings shot out of the gate. According to Refinitiv, of the 49 S&P 500 companies that have reported, 86% have beat estimates. Of course, the bar may be set even lower than usual. Still, a beat is a beat. (Source: Refinitiv)

In addition to the earnings announcements, the economic calendar will also feature important housing data this week. The announcements will include today’s builders’ sentiment report, housing starts tomorrow, and existing home sales on Thursday.

As the cold weather hits and COVID-19 caseloads increase, it’s more important than ever to wash your hands and do all you can to protect yourself from germs.

Stay healthy and be well!

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