Equity markets were mostly flat this week, after large swings left investors looking for direction. Caution remains prevalent as the election is less than three weeks away, and investors are positioning portfolios for a very uncertain outcome. Meanwhile, US corporations began reporting earnings from last quarter this week, with the major banks leading off. The results thus far have been reasonable, with those banks focused on trading faring best while those with an emphasis on traditional bank lending providing poorer earnings. In a relative boost to confidence, reserves set aside for potential loan losses were cut back to historical norms as banks are appearing less concerned about defaults than initially feared from the current recession. On the economic front, another mixed jobs report this week showed a rise in applications for jobless benefits, demonstrating the slow pace of rehiring. Encouragingly though, ongoing claims fell by over a million, though remain near a staggering 10 million individuals. Manufacturing data also showed surprising positive momentum, with the Philly Fed index jumping to 32.3 from 15 in September, led by the strongest orders growth since 1973.
Stimulus talks appear to be going nowhere until the election is completed, though glimmers of hope continue to emerge on a daily basis. Markets appear to be largely accepting of that reality, but the daily swings are mostly hinging on the outcome of more support coming out of Washington in the coming months. With true unemployment rates hovering near double digits and existing unemployment benefits falling, it could be a tough winter for many households if relief is not provided. Adding to the troublesome statistics, never before have so many large public companies in the US been unprofitable, not even during the global financial crisis of 2008. This fact has left equity markets bifurcated for now between the work-from-home winners that have seen their stocks soar and those dependent on primarily in-person services suffering the most. You wouldn’t know of the struggles by looking at the headline numbers for the S&P 500 or Down Jones Industrial averages, which are both either nearly flat or positive for the year. But the distinctions beneath the surface for individual companies remains significant, and opportunities likely abound, particularly as the election could create more clear-cut beneficiaries for the coming years ahead.
We continue to prepare for the upcoming election by making adjustments in portfolios to reduce potential exposure to anticipated volatility ahead. Cash levels have risen, and we are strategizing for multiple potential outcomes in the coming weeks to rebalance portfolios. Another concern many investors have on their minds is the potential for wealthier owners of stocks to liquidate significant positions prior to the end of 2020 to lock in current capital gains rates on their sales. With fears of higher tax rates ahead, this may be prudent for some, but we believe this could portend a temporary sell off for markets that presents more opportunity than longer-term headwinds for equity markets.
As always, we continue to remain extremely focused on monitoring unfolding market dynamics and reacting only when appropriate. Please feel free to call our office with any questions you may have.