After the week started with a bang, what kind of follow-up might be in store? Maybe one where the market just drifts around looking for direction, in part because of trepidation ahead of tonight’s presidential debate.
The cautious mood seems to be reflected in pre-market trading, where major indices were barely changed ahead of the open. Besides the debate, focus could turn toward Fed policy, with no fewer than five Fed officials scheduled to deliver remarks spread out across the day. Investors also await any stimulus-related developments in Washington, D.C.
Volatility was pretty muted yesterday, and futures trading doesn’t indicate much in the way of expected choppiness early on. That could change quickly if the debate raises any concerns, so continue keeping an eye on the Cboe Volatility Index (VIX), which is up a bit in the early going—to right around 27.
Momentum And Merger Monday
When people talk about “a case of the Mondays” they’re often using the phrase to talk about being in a bad mood to start off the work or school week. Well, this week started on a much better foot, with stocks getting up on the right side of the bed.
All three of the main U.S. indices rose more than 1.5% Monday. Some of the gains may have been momentum from a strong performance on Friday, but the market also got help from news about a potential domestic stimulus deal, merger and acquisition announcements, and an encouraging reading on Chinese industrial profits.
Comments from House Speaker Nancy Pelosi about chances for a last-minute coronavirus aid deal helped cheer investors who have been hoping that Congress will pass additional stimulus. Extra funds for Main Street might help boost consumer spending, which is a big driver of the health of the domestic economy as well as global fortunes.
M&A activity can be a sign of a healthy market. It tends to be looked on positively by investors because it signals that the acquiring companies see value in what they’re buying and because the acquirers are often viewed as being healthy enough to make purchases that involve paying premiums for what they’re buying. (See below for a more in-depth look at the announcements.)
In addition to gains from DVN and WPX, rising oil prices also helped boost the Energy sector. Oil futures gained ground amid the risk-on sentiment sparked by hopes of a congressional stimulus package. With a 2.33% gain, Energy edged out Financials to cinch the lead among the S&P 500 Index’s (SPX) 11 sectors.
Financials Sector Has A Good Day
The Financials sector, another hard-hit segment of the stock market, was a close second, rising 2.27%. As with the Energy sector’s gains, there may be an element of bargain hunting behind Monday’s gains as Financials were off more than 14% on the year through Friday’s close. Ten-year yields were a bit higher yesterday, which might have helped the sector, but let’s put things in perspective: They remain historically low.
Banking stocks have gotten hammered as their profitability has taken a hit from ultra low-interest rates and socking away money for loans that might go bad because of the pandemic. While cost-cutting has helped, and the Fed’s new policy of inflation averaging has helped steepen the yield curve, a broad rally in the banks might not be in the cards until we see more marked economic improvement.
As we pointed out in yesterday’s outlook for October, research firm FactSet expects the Financials sector to be among the bottom-four earnings performers for the third-quarter earnings season.
Looking For Leadership
Without leadership from the Financials, it can be hard to sustain broad rallies over the longer term. We’ve been seeing that lately as leadership from mega-cap technology-related companies has been a double-edged sword, helping the market some days and pushing it lower on others.
A combination of upward leadership from tech and banks would arguably help underpin a broad market rally. But for that to happen, the broader economy probably would need to be in better shape.
The big cloud hanging over the economic recovery is a potential resurgence in coronavirus cases as the weather cools. On top of that worry, the market could also remain choppy as we near earnings season and the election in November. While up-days like Monday are a welcome sign for bulls, they aren’t a sure thing given the amount of uncertainty in the market at the moment.
TD Ameritrade® commentary for educational purposes only. Member SIPC.
Photo by Alexandre Debiève on Unsplash
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