Before The Bell - The penultimate trading day of the final week of October is set to begin with the bulls licking their wounds. Indeed, the first three days of the week, punctuated by Monday’s and yesterday’s sharp selloffs, have not been kind to those long equities. The investment community has been rattled by reports of spiking coronavirus cases around the world and worries that the COVID-19 pandemic may result in some more temporary lockdowns both here and abroad, which would not be good news for the global economy. News out of Germany and France about more lockdowns prompted additional selling into yesterday closing bell, on day that saw the CBOE Volatility Index (a measure of fear in the stock market) spike nearly 20%.

The COVID-19 health and economic concerns have prompted a flight to safety strategy on Wall Street, with investors moving out of riskier stocks and into safe-haven securities, like fixed income. This has resulted in two outsized setbacks for the major equity averages, with the Dow Jones Industrial falling by 2.3% and 3.4%, respectively, on Monday and Wednesday. The broader S&P 500 Index and the NASDAQ Composite also have been under heavy selling pressure. The COVID-19 worries, along with the uncertainty surrounding next week’s Presidential election and the unlikelihood of a near-term coronavirus fiscal stimulus package on Capitol Hill, have been a body blow to traders. Hence, the heavy profit taking of late after the major averages recovered sharply from the initial coronavirus concerns in mid-March.

So what is an investor to do in this environment? For one, we would recommend that subscribers take a close look at the stocks that Value Line ranks 1 (Highest) or 2 (Above Average) for Safety. These stocks, which are comprised of many blue-chip issues, have historically outperformed the broader market during turbulent times. A list of these stocks are available to subscribers on valueline.com

No sector was spared in yesterday’s respective declines of 943, 426, and 120 points for the Dow 30, NASDAQ, and S&P 500 Index, with sharp setbacks recorded in each of the top-10 major equity groups. The biggest laggards were the economically sensitive energy, technology and basic materials sectors. Overall, decliners swamped advancers on both the New York Stock Exchange and the NASDAQ, with the ratio at 10-to-1 on the Big Board. The technology stocks, which entered October with frothy valuations even after an unmemorable September performance for the sector, were most susceptible to profit taking in a down tape. Not helping matters were appearances of the leaders of Facebook (FB), Alphabet (GOOG), and Twitter (TWTR) before Congress yesterday to discuss their companies’ content moderation practices. The tough questioning from U.S. Senators brought to the forefront whether the social media companies should be afforded the protections granted to them under Section 230, which was designed to encourage free expression.  

The heightened COVID-19 worries on Wall Street have thwarted any boost stocks may have gotten so far from third-quarter earnings season, which has seen a number of companies beat expectations. In fact, even stronger-than-expected fiscal first-quarter earnings from technology behemoth Microsoft (MSFT), thanks to surging growth in its cloud business, did not provide support for the technology sector. Microsoft earnings for the three months ending in September climbed 32%, year over year, to $1.84 per share, well ahead of Wall Street’s consensus forecast, on a 12% top-line gain, to $37.2 billion. The ”Wall of Worry” posed by the aforementioned trio of events, is so far proving to be too high for investors to climb even on the shoulders of some positive earnings news from the corporate world. After today’s closing bell, the investment community will get the latest quarterly results from technology titans Apple (AAPL), Amazon.com (AMZN), and Google’s parent company, Alphabet.

Meantime, the U.S. economy will also be in focus this morning. Just moments ago, the Commerce Department released its first report on September-quarter GDP, and it made for a good reading. Specifically, the nation’s GDP rebounded by 33.1% in the third quarter after reporting a decline of more than 30% in the COVID-19 impacted June period.  The GDP estimate beat expectations. Likewise, initial unemployment claims came in at 751,000, which was lower than expectations calling for 775,000 new applicants.

Before the market’s open, the equity futures, which were running lower into the economic releases, reversed course quickly and erased a good portion of the earlier losses. Looking ahead, will the positive earnings and economic data released this morning be enough to overcome the escalating worries about COVID-19? Stay tuned.  – William G. Ferguson

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.