October toil and trouble
E*TRADE Capital Management
What started as a relatively upbeat October for the stock market ended somewhat grim. A resurgence of COVID cases and tightened lockdown restrictions across the globe, along with continued stimulus gridlock in Washington and election angst appeared to spook investors.
Here’s a quick rundown of what happened in the markets last month and what’s on the horizon.
After a strong start, stocks moved lower in the back half of October—with the final week wiping out the S&P 500’s gain for the month and registering the first back-to-back down months for the index since February–March. The small-cap Russell 2000 led the major US averages, finishing solidly in the green and outpacing large caps by the widest margin in years.1
Third-quarter earnings season kicked off solidly. With more than half of companies in the S&P 500 reporting, results have largely beat analyst estimates, but some businesses that proved resilient in the early stages of the pandemic may be facing the challenge of lofty expectations. Heavy-hitting tech names like Twitter, Facebook, Apple, and Amazon saw their stocks fall after mostly topping their headline numbers, but also failing to deliver the kind of growth and guidance that previously wowed Wall Street.2
On a sector level, utilities (a typically defensive play) was the strongest performer, while technology moved to the back of the pack.
International equities—particularly developed markets—also appeared to take a hit amid the new COVID wave. But emerging markets were a bright spot: These stocks showed surprising strength, nearly catching up to their US peers for the year.
Interest rates rose with the benchmark 10-year T-note starting the month at 0.69% and ending at 0.85%. The yield curve steepened slightly, with longer-term rates rising more than shorter-term. While a steepening yield curve is typically seen as a sign of future economic growth, it can also signal future inflation. The riskier parts of the fixed-income market, such as high-yield corporates, generally performed the best.
Last month served as a reminder that bonds can add stability in down markets, helping to balance out higher-volatility assets, and remain a key component of a well-diversified portfolio.
This year has repeatedly illustrated how uncertainty and emotion can challenge even the most disciplined investors. And November will undoubtedly present challenges as the election unfolds and we move into the winter months.
Here are a few points to keep in mind:
- Election outcome: When it comes to politics and investing, it may be best to tune out the noise. While the possibility of a delayed outcome has added another layer of uncertainty, the bottom line is that we will, ultimately, have a resolution. Any volatility associated with the election will likely be a limited disruption—not something that should influence long-term decisions.
- Unified vs. divided government scenarios: When it comes to enacting future policy, the makeup of the House and Senate may be more important than who’s occupying the Oval Office. Our colleagues at Morgan Stanley have mapped out the risks and opportunities in four possible election outcomes.
- Virus data: The path of the recovery remains largely contingent on the course of the virus and whether the recent resurgence will result in another round of lockdowns. While US GPD grew at a record 33% in the third quarter and new jobless claims are hovering near their lowest levels since March, if pockets of the economy are forced to shutter, it may stall the recovery, which could in turn change the trajectory of the market.
- Stimulus stalemate: The election has only heightened the bitter bipartisanship on Capitol Hill, as both sides fall short on compromises in hopes of more clout post-November 3. The good news is we may have more clarity on the timing and size of the next stimulus package in the coming weeks. But the rising tide brought by additional stimulus—or in the present case, the potential for future stimulus—may not lift all sectors equally.
Finally, while the market volatility these last few days has certainly been unnerving, remember we have weathered similar situations before. Diversifying a portfolio across asset classes remains the key for long-term investing and can help investors ride out all market conditions.
Thanks for reading. We’ll talk to you again next month.
- The Wall Street Journal, “Bets on Biden-Led Stimulus Fuel Outperformance by Small Stocks,” 10/29/20, https://www.wsj.com/articles/bets-on-biden-led-stimulus-fuel-outperformance-by-small-stocks-11603963803
- CNBC, “Apple, Twitter, Facebook, Amazon stock down in premarket after earnings fail to wow Wall Street,” 10/30/20, https://www.cnbc.com/2020/10/30/apple-twitter-facebook-amazon-stock-down-after-earnings.html
Managing Director, Investment Strategy, E*TRADE Capital Management, LLC
Mike Loewengart is the Managing Director of Investment Strategy for E*TRADE Capital Management, LLC. Mike is responsible for the asset allocation and investment vehicle selections used in E*TRADE’s advisory platforms. Prior to joining E*TRADE in 2007, Mike was the Director of Investment Management for a large multinational asset management company, where he oversaw corporate pension plan assets. Early in his career, Mike was a research analyst focusing on investment manager due diligence for the consulting divisions of several high-profile investment firms. Mike holds series 7, 24, and 66 designations, as well as the Chartered Alternative Investment Analyst (CAIA) designation. He is a graduate of Middlebury College with a degree in economics.
Senior Director, Investment Strategy, E*TRADE Capital Management, LLC
Andrew Cohen is the Senior Director of Investment Strategy for E*TRADE Capital Management, LLC. Prior to joining E*TRADE, Andrew was the Director of Investments and Operations for a large Registered Investment Adviser, where his responsibilities included investment manager research, asset allocation, and portfolio construction. Previously, he was a Senior Research Analyst and Team Leader for a leading wealth management platform. He is a CFA® charterholder and a member of both the New York Society of Security Analysts and CFA Institute. He is a graduate of Virginia Tech with a BS in finance.