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Before The Bell - With three trading days left in September, the month has not been one to remember for those long equities. There has been a spike in stock market volatility, with investors pondering a number of questions that right now have no answers. This has increased the uncertainty in the equity market, which is typically not a good backdrop for investing. Hence, the stretch of selling that we have seen on Wall Street this September. Last week, the Dow Jones Industrial Average and the broader S&P 500 Index were down for the fourth-consecutive week during what has been the longest losing streak for equities in more than one year.

The issues that are currently unnerving investors include: the uncertain outcome of the fast-approaching elections on November 3rd, the lack of an agreement on Capitol Hill on another fiscal stimulus plan to counteract the economic pain caused by the coronavirus pandemic stateside (more below), and the recent spike in COVID-19 cases around the globe. The worries about the U.S. economy were exacerbated by an uninspiring outlook from the Federal Reserve earlier this month, with the central bank noting that it will likely have to keep interest rates historically low through at least 2022. All of these factors have raised the level of anxiety in the investment community and promoted the recent “flight to safety” on Wall Street. The most severe profit taking has been seen in the technology sector, where valuations were looking quite frothy when the month began.

On Friday, investors were given a bit of a reprieve after some heavy selling earlier in the week. The rally, which saw the Dow 30, the NASDAQ Composite, and the S&P 500 Index climb 359, 241, and 52 points, respectively, came on the strength of big technology. The tech stocks, which have recently been under notable selling pressures, were in demand on Friday, and look to be again this morning. In general, it was a strong day for stocks to end last week, with all of the 10 major equity groups, save for the energy one, finishing in positive territory and advancing issues far outnumbering decliners on both the Big Board and the NASDAQ. The strong conclusion pushed the NASDAQ Composite (up 1.1%) into positive territory for the five-day stretch. The large-cap Dow 30 and the S&P 500 Index, however, finished in the red with respective weekly setbacks of 1.8% and 0.6%. 

So what should investors expect in the coming days? Our sense is that volatility will remain the name of the game on Wall Street. The aforementioned questions unnerving investors still remain unanswered and there are a few additional events that may add to the volatility this week, including the observance of Yom Kippur to start the week, which may result in some light trading volume today; lighter volume can often lead to more pronounced moves for the major averages. We will soon see what unfolds today; the initial move should be sharply to the upside. Then on Wednesday, the market may be impacted by some portfolio rebalancing by money managers ahead of the end of the third quarter. This is referred to as “window dressing”.    

It will also be a very busy week on the business beat, with a number of very important reports due on the U.S. economy. The headline event with be the release of September employment figures before the opening of trading on Friday morning. This report could potentially have a major impact on trading, as it will be closely monitored by the Federal Reserve for clues to how the U.S. economy is rebounding from the economic shutdowns earlier this year due to COVID-19 and it will also be the last reading on employment and unemployment before the November 3rd elections. But before we get this much anticipated report on the labor market, we will get data on consumer confidence, manufacturing activity, personal income and spending, and the final revision to second-quarter GDP. The economic news have the potential to drive trading this week, so we encourage investors to keep close tabs on the economically sensitive sectors, including the consumer discretionary, industrial, financial, energy, basic materials, and technology groups. A number of these sectors have been under notable selling pressure over the last few weeks, so any positive news on the economy might bring some buying in these categories.

Before the market’s open, the equity futures point to a sharply higher start for the U.S. stock market. Most of the main indexes in Asia finished higher overnight, while the major European bourses are trading notably higher as trading moves into the second half of the session on the Continent. Giving the markets a boost are some hopes that lawmakers on Capitol Hill might still pass another coronavirus stimulus package before the November election. Secretary of Treasury Steve Mnuchin and House Speaker Nancy Pelosi are said to be talking about another round of relief that would provide support to individuals and businesses hardest hit by the COVID-19 pandemic. This news is prompting some return to riskier assets, with the technology stocks being the prime beneficiaries. Banking stocks also are looking to be in demand this morning. 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.