Stocks posted strong gains last week – the Dow Jones Industrial Average rose 3.3%, the Standard & Poor’s 500 Index added 3.8%, and the NASDAQ Composite increased 4.6%. Away from the three major indices, the Russell 2000 Index was a standout as it posted another strong weekly gain, jumping 6.4% and hitting its highest level since February.
Reasons behind last week’s rally included:
- Stimulus – reports last week indicated the Trump administration upped its stimulus proposal to $1.8 trillion (from $1.6 trillion previously and compared to the Democrat’s $2.2 trillion proposal). Further, President Trump personally commented he wanted an even “bigger stimulus” and the market is hoping both sides can come to an agreement.
- Election Uncertainty – recent polls (showing Biden widening his lead) lessened market anxiety over a contested election. The market does not like uncertainty and many investors worry the market would suffer under weeks of legal and political arguing in an election that was too close to call. Additionally, the markets perception is that fiscal stimulus may even be larger under a Biden administration.
- Covid-19 Progress – Various reports increased optimism that the situation is improving regarding treatments for the coronavirus as there is more evidence some key drugs may aid in recovery and shorten the recovery time. Additionally, the timetable for approvable vaccines still seems to be in line with investors’ expectations.
Earnings season kicks off this week as several big banks are scheduled to report results, including Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and Goldman Sachs. Away from the financial sector, we’ll be looking at earnings from companies including Intuitive Surgical, Fastenal, Johnson & Johnson, United Health Group, and Walgreens Boots Alliance.
Regarding overall expectations, earnings for the third quarter of 2020 are expected to decline by 20.5%, which would mark the second largest year-over-year decline in earnings since the second quarter of 2009, according to data from FactSet. Remember, the market is forward looking and is already looking past this decline in earnings and factoring in what it believes 2021 will be like. The big picture the market is looking at is one showing continued easy monetary policy, a large stimulus package at some point, and progress on treatments/vaccines for the coronavirus – leading to an economic recovery in 2021, which is why the market is rallying.
All the best – Southport Station Financial Management, LLC