Capital 19 Catch-Up

Stocks sell on rising virus numbers


Talk about a Halloween scare.  In a week where the S&P 500 has historically risen 1%, it traded down more than 5% which was its worst one-week performance since the COVID crisis.  Even more notable was the fact that it was the worst performance for the S&P 500 in the last full week before a Presidential election on record. At the close on Friday, the S&P 500’s week-to-date decline was nearly twice the decline of the second-worst week in 1932 when the S&P dropped 2.96% in the last full week leading up to the 1932 election of FDR!

When it rains, it pours, and this week was a monsoon for the market.  Besides tomorrow’s election, investors have had to contend with rising COVID cases, earnings season, and a nail in the coffin for stimulus hopes before Election Day.  Compounding matters even more is that while much of Wall Street had priced in a blue wave as nearly a sure thing, polling in the last week has tightened a bit.  That’s not to say what the market’s preference is regarding Biden or Trump, but for investors looking for a big round of stimulus, a Biden Presidency and a Republican Senate is a nightmare scenario.

All of the above concerns are playing a role in the market’s weakness lately, but we would point to the election as the largest factor at play, and at this point, who wins or loses is almost less important than someone winning and moving on.

You can read more on our election views in our special article here

“If there’s no clear winner, it will be negative for risk assets. The market is really worried about not having clarity after the election. They’re worried about it dragging out for weeks as the results are contested,” said Ian Lyngen, head of U.S. rates strategy at BMO.

The S&P 500 broke down below the 3400 level it had barely held the week before, which dropped it back into the September correction zone and had every trader watching 3230 as a decisive level. This is the September closing low, the peak from June from the initial rally off the March low, and the year-to-date break-even line.

After this recent selling, stocks are beginning to look oversold. By Friday about half of all S&P 500 stocks were at least 20% off their high. Stocks have traded quite poorly off earnings coming in far ahead of forecasts, yet forward profit forecasts have nonetheless held up.

The S&P’s valuation on year-ahead earnings estimates, while by no means cheap, is now down near 20 from 23 two months ago. And whatever the chances of a Covid vaccine approval now, it is nearer and no less likely than it was a couple months ago.

These factors make it a perfectly plausible spot for a rebound attempt and suggest the risk-reward trade-off for long-term investors has improved as stocks have come down — which is almost a law of nature.

Big-Tech took centre stage last week with Facebook (FB), Apple (AAPL), Twitter (TWTR), Amazon (AMZN) and Alphabet (GOOG) all reporting earnings on Thursday.

Shares of Facebook, Apple and Amazon all fell roughly 6% in Friday trading, with Twitter taking a greater than 20% hit. Alphabet shares were up 4% in afternoon trading.

We like Facebook here. If you are a small company, Facebook is critical to conducting your business. We suspect we will continue to see significant advertising on the platform, especially as the chances of more lockdowns increases.

Apple (AAPL) fell on news of the iPhone miss. We think the market has oversold this one, as the delay in the iPhone 12 release meant we missed a few weeks of sales in the quarter. Tim Cook mentioned the iPhone was growing in low single digits by mid-September. So, if you add in say 3% growth then you get an overall revenue growth in the 14-15% year over year in the quarter. This would be up from the 11% of last quarter and shows Apple is continuing to grow. We would be happy buying more here.

Twitter (TWTR) is a different story. There is only so many users they can add in the quarter so the future for this one is about the ability to monetise their base, rather than grow their numbers and we don’t think they have the same opportunity to do so like some of the other names.

Amazon (AMZN) is struggling to meet deliveries as fulfillment centres are finding it hard to get products in and out as quickly as possible due to the virus. The fourth quarter could be a challenge for the company.

Alphabet (GOOG) has one of the biggest cash hoards ever and we saw them buying back stock in the quarter. The google results were good and are only set to get better as they have more exposure to travel businesses than others. Of course, at the moment, travel business is not where you want to be. But it will be again one day and when that revenue stream comes online again it will only add to their numbers.

The big negative for markets at the moment is the rising virus cases. The US reported over 99,000 new cases in a single day. Boris Johnson is shutting all of England down. We have seen similar in France and Germany. If Biden gets in tomorrow, he might well shut the US down in January when he takes charge.

In this scenario it might well be time to revisit out Pandemic Portfolio so we have updated it here. Adding some of these names to your portfolio now could well prove timely.

It should be an exciting week ahead with our Melbourne Cup on Tuesday and we will be able to watch the US election results on Wednesday. (we think it will be very positive for stock prices)

Lastly, the US has entered summer time so market hours are now from 1.30am Sydney time, to 8am.

Stay safe and stay long