For months, health experts warned that the U.S. was headed for a difficult winter grappling with the coronavirus. In recent weeks, it’s become apparent those predictions were accurate. The U.S. logged 163,000 new cases on Thursday last week, the highest single-day total of the pandemic. Meanwhile, the death toll is now just shy of 250,000 Americans. It’s important to acknowledge that this has been a difficult year for so many families in this country.
However, there’s light at the end of the tunnel, and that’s what’s kept the market’s focus throughout the week. That’s because Pfizer, in partnership with BioNTech, on Monday announced its vaccine candidate was shown to be 90 percent effective in preliminary phase 3 trial data. Meanwhile, this morning Moderna announced its vaccine candidate was 94.5 percent effective during its phase 3 trial.
Based on last week’s vaccine news, stocks rallied to open the week, and momentum largely carried through to Friday. We also saw a notable shift from red-hot, at-home stocks to so-called “epicenter” stocks, or sectors most sensitive to the coronavirus, such as travel, energy and leisure. So why are stocks rallying when the coronavirus news seems to be getting worse?
Quite simply, Pfizer’s vaccine revelation made it clear an end to the pandemic is within sight. No doubt, the next few months could prove difficult, but the vaccine represents a bridge over turbulent waters. Markets, for now, are willing to look past a “dark” winter and ahead to a broader, post-coronavirus recovery sometime in 2021.
Other factors working for the markets: A clearer vaccine distribution timeline could make it easier for lawmakers to hammer out a targeted “skinny” aid package to help Americans through to spring. We expect a handful of other pharma firms to report phase 3 data for their respective vaccine candidates in the next few weeks. And even as cases rise, treatment is improving, and a national lockdown is unlikely (although local restrictions and advisories are occurring).
Overall, markets are shifting from a posture of “if” we’ll return to normal to targeting “when” we’ll return to normal.
WALL STREET WRAP
Q3 Earnings Season Wrapping Up: We’re reaching the end of the quarterly earnings season, and Northwestern Mutual portfolio managers Matt Stucky and Jeff Nelson pulled together some takeaways. The quarter saw the highest percentage of earnings beats for S&P 500 companies (449 have now reported) for any Q3 since the data started being tracked 27 years ago. Companies fared better than expected in the quarter. The average revenue surprise was 2.3 percent over consensus estimates, and the average earnings surprise was 18.6 percent, which is one of the strongest seasons ever vs. consensus. Still, revenues and earnings were down 2.23 percent and 8.53 percent year-over-year, respectively — much better from the second quarter, when revenues were down 9.35 percent and earnings cratered 30.18 percent.
“The cost-cutting many companies have been forced to implement from the pandemic is resulting in longer-term cost savings for many,” says Nelson. Leaner, more productive operations could bode well for company performance going forward into next year as we see a recovery.
Small Business Optimism Steady: The NFIB Optimism Index remained at 104 in October, unchanged from September. That’s a historically elevated level, though uncertainty about the future was also at its highest level since November 2016 — likely driven by the election and COVID-19 uncertainty.
“We see solid momentum going into the fourth quarter, and another good quarter could get the GDP back to its 2019 closing levels,” said NFIB Chief Economist Bill Dunkelberg.
Of course, the rise in coronavirus cases and some restrictions around the country could pose a challenge for businesses heading into the final quarter of the year.
Prices Flat in October: The consumer price index was unchanged in October, although expectations were quite low. The yearly rate of inflation slowed slightly to 1.6 percent last month from 1.7 percent in September. While prices for staples like groceries and electricity rose, they were offset by declines in gasoline, clothing, medical care and car insurance. More broadly, prices for services rose but at a slower pace than goods last month. The Federal Reserve has stated repeatedly that it would like to see inflation reach 2 percent for an extended period to aid with growth and employment going forward.
A Partisan Outlook for the Economy: Consumer sentiment dipped to 77 in the two weeks ended Nov. 10, from 81.8 in October. It’s the first read on consumers since the election, and data show consumers’ outlook on the economy diverge based on party affiliation. There was a notable negative shift in the expectations index among Republicans, dipping to levels not seen since President Donald Trump took office in January 2017. There was no gain among Democrats, as concerns about the coronavirus likely offset any increased optimism about the economy. According to the University of Michigan survey, nearly 60 percent of Democrats said the coronavirus had significantly changed their daily lives, as opposed to 34 percent of Republicans.
Keep in mind, the survey was conducted prior to Pfizer’s news about the vaccine, which may shift consumers’ views about the future.
THE WEEK AHEAD
A Big Focus on Retail: Earnings from retail heavyweights will be a big focus this week as Target, Walmart, Home Depot, Lowe’s, Macy’s, Kohl’s and others report this week. Expect to hear a lot about those companies that are quickly adapting to serve customers in a “new” normal — shopping online, curbside pick-up and delivery. We’ll also get a pretty good gauge into consumer spending trends, as well as ways companies are preparing for the holidays and pandemic-driven stockpiling. In addition to earnings, we’ll also get the retail sales print from October on Tuesday.
Keep this in mind as we enter the holiday season: Consumers are sitting on higher savings levels than last year, and credit card balances have dipped — two factors that bode well for spending in Q4.
From the Housing Sector: This week we’ll also get another round of housing data, from home builder optimism to housing starts. As we’ve seen throughout 2020, housing has been a bright spot for the economy, and tailwinds such as low rates, limited inventory and a flight to the suburbs remain intact.
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As the chief investment officer at Northwestern Mutual Wealth Management Company, I guide the investment philosophy for individual retail investors. In my more than 25 years of investment experience, I have navigated investors through booms and busts, from the tech bubble of the late 1990s to the financial crisis of 2008-2009. An innate sense of investigative curiosity coupled with a healthy dose of natural skepticism help guide my ability to maintain a steady hand in the short term while also preserving a focus on long-term investment plans and financial goals.