Free Fallin’: A Pre-Election Stock Market Story



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The S&P 500 fell 5.5% this week, this was the stock market’s worst weekly performance leading up to a presidential election in history. Uncharacteristically, the 10 year treasury yield rose 2 basis points (safe-haven bonds fell in price). This is an unusual dynamic given Treasury bonds historical tendency to rise (yields fall) during periods of stock market weakness. Despite strong tech company earnings and a remarkably strong earnings season overall, this past week’s poor performance was driven by growing concerns surrounding the recent rise in coronavirus infections, lockdown announcements in Europe, and the impact these will have on the potential for a continued economic recovery. Amidst all this, The VIX (the benchmark measure of implied volatility) rose to its the highest level since June.

Another factor that likely impacted investor sentiment has been the uncertainty surrounding the election outcome. To date, there have been 230 election-related lawsuits filed. With US election day on Tuesday, we reviewed some predictions from the Superforecasters:

  • 35% chance that a presidential campaign will concede defeat before November 8

  • 87% chance that Joe Biden will win the presidency

  • 76% chance that the Democrats will control both the House and the Senate

  • 7% chance that a new fiscal stimulus will be passed before January 1

Under ordinary circumstances the coming week would have investors engaged with the FOMC meeting on Wednesday and the employment situation report on Friday but the story will be the presidential election. The whole world will be watching.

Chart(s) of the Week

Source: Bloomberg

Source: Schwab

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Atlanta Fed GDPNow is currently tracking at 2.2% for Q4.
New York Fed GDP Nowcast stands at 3.24% for Q4

US GDP was 33% annualized for Q3 vs. 31% consensus, but the economy is still 3.5% smaller than it was before COVID.

  • One component that had been weak before COVID is Non-residential construction spending. It fell 14.6% in the third quarter, which was the 4th consecutive quarterly decline. A large part of this decline is cutbacks being experienced in the country’s energy sector as a result of low oil prices.

Source: Morgan Stanley

Source: Macquarie Bank

US durable goods orders for September +1.9% (beat expectations of +0.5%) & core capital goods +1.0%.

  • Orders and shipments for vehicles and parts up 1.5% and 1.6% respectively.

  • Small business plans for capital expenditures continue to rise demonstrating a continued positive outlook by businesses for the economy and their own companies.

Source: Oxford Economics

Source: Morgan Stanley

Consumer Confidence headline index -0.4pt, to 100.9.

  • The share of consumers reporting jobs as plentiful rose to 26.5%, from 23.6%.

  • Share reporting jobs as hard to get fell to 19.9%, from 20.3%.

    • A good improvement for the labor market but there is still a long way to go before consumers feel as good about the their job prospects as they did pre-COVID.

  • Economic expectations fell to 98.4, from 102.9.

    • “There is little to suggest that consumers foresee the economy gaining momentum, especially with COVID-19 cases on the rise & unemployment still high.”

  • Assessments of the present situation rose to 104.6, from 98.9.

Source: Oxford Economics

US Initial Jobless Claims 751k vs. 775k expected. Continuing claims significantly improved, now at 7.76mln from 8.37mln.

  • The 4 week moving average of jobless claims is below 800k for the first time since March.

Personal spending in the US +1.4%m/m in September.

  • Real spending +$159.2 billion, an increase of $109.9 billion in spending for goods and a $61.0 billion for services. The sub-categories most impacted during the pandemic are responsible for the underperformance from services.

  • Within goods leading contributors were: clothing and footwear, motor vehicles and parts (led by new motor vehicles).

  • Within services: spending for health care (led by outpatient services) and recreation services (led by membership clubs, sports centers, parks, theaters, and museums).

  • “A sustainable recovery cannot occur until the service sector is fully open because it accounts for roughly 60% of GDP and over 85% of the employed workforce”. -Joe Carson, former chief economist at AllianceBernstein

Source: Macquarie Bank

US personal income +0.9% from September, up from a revised -2.5% in August.

  • The monthly gain was due to increases in proprietors’ income, employee compensation, and rental income, all partly offset by a decrease in government social benefits.

The Eurozone economy grew +12.7% for Q3 after falling 11.8% in Q2.

  • Record increases in GDP:

    • France (+18.2% vs -13.7% Q2)

    • Spain (+16.7% vs -17.8% Q2)

    • Italy (+16.1% vs -13.0% Q2)

    • Germany (+8.2% vs -9.8% Q2)

The unemployment rate in the Euro Area remained flat at 8.3% in September.

  • 13,612mln people were unemployed in the Euro Area in September, +75,000 from August and +1.376mln from a year earlier.

NBS Manufacturing PMI for China 51.4 for October.

  • Continuation of an 8 month expansion in manufacturing and factory activity

  • Business sentiment also slightly strengthened (59.3 vs 58.7).

South Korea’s October consumer confidence levels are now at the highest level since the Covid outbreak in February. The economy relies on exports and the pickup in confidence bodes well for a continued global recovery in the coming months.


The ECB announces no changes in its policy stance, as expected.

  • Added an opening paragraph to their monetary policy statement that highlighted the economic risks in Europe are to the downside.

  • In her press conference, ECB President Lagarde said that the euro area is, “losing momentum more rapidly than expected”.

The ECB Q3 Bank Lending Survey shows that banks’ approval criteria for loans to firms and households has tightened.

  • Banks are becoming more hesitant to make loans due to economic risk associated with the coronavirus.

  • Banks themselves continue to have good access to short and long term funding.

Bank of Canada announced a small tapering of QE purchase last week.

  • Pace goes from at least C$5lbn per week to C$4bln, and BoC will be shifting purchases toward longer-term bonds.

  • Growth "will continue to rely heavily on policy support." The bank lowered its estimates of potential growth to 0.9% in 2021 and 1.1% in 2022- down from 1.8% and 1.9%

  • As a result it is now estimated that the output gap will not be closed until at least the end of 2022 and inflation will not reach 2% until then as well.


Leveraged buyout market rebounded significantly in Q3 on the back of readily available, low rate financing.

  • $146bln in global new deals versus $53.3bln for Q2 and $104bln for Q1.

The oil market continues to struggle this year, as ExxonMobil announces it will lay off around 1,900 employees and Chevron will be working towards reducing their headcount by 10% to 15%.

  • The oil, gas, and chemical industry has laid off roughly 107,000 workers in the second and third quarter of this year, according to a Deloitte Insights.

  • More than 200 companies filed for bankruptcy in the last five years, including 17 in this year's third quarter alone.

  • The S&P 500’s energy sector is down 50% year to date and has now generated a total return of -20% since 2008!

Morgan Stanley sees a lucrative opportunity in the private credit market as mid-size firms look for liquidity.

  • David Miller, head of Morgan Stanley's private credit and equity business sees the space as the most attractive in more than a decade

  • Lauren Silverman, CIO at Morgan Stanley believes there’s an opportunity in sectors tied to e-commerce that present the most fruitful opportunities.

Bitcoin has surged 25% in the month of October to levels not seen since January 2018, closing the week around $13,800. The recent rally may be driven by institutional acceptance, rather than a retail frenzy.

  • PayPal announced their users will soon be able to buy, hold and sell Bitcoin. Their platform supports nearly 26 million merchant accounts and 345 million users on its platform.

  • As discussed in the August 30th summary, Fidelity Investments is launching a Bitcoin fund and in our September 11th edition, we highlighted Square’s $50 million dollar Bitcoin investment. Bitcoins institutional acceptance will be an integral part of a larger and more widespread adoption of a digital currency.

Source: Bloomberg

Major state-owned Chinese banks have swapped US dollars for yuan throughout the week according to market sources.

  • China is trying to short-circuit the significant rally in their currency, they have historically used state-owned banks as a means by which to influence the currency.

  • You may recall that earlier this month the PBoC lowered the reserve requirement ratio to zero for financial institutions when conducting certain currency transactions, foreshadowing the intervention.


As of Friday, 64% of the S&P 500 had reported their Q3 results. Earnings season has been strong relative to expectations, across the board.

  • 86% of companies have beat their EPS estimates versus a 5-year average of 73%.

    • Aggregate reported earnings are 19% above forecast however earnings are still down approximately 10% y/y.

  • 81% have reported revenue above wall street estimates versus a 5 year average of 61%.

    • Aggregate reported revenues are approximately 3% ahead of forecasts by Wall Street but down 2% y/y.

Las Vegas Sands is exploring the sale of its Las Vegas strip assets: the Venetian and Palazzo casinos, and the Sands Expo and Convention Center.

  • Value is speculated to be $6bln for the assets.

  • The company’s US assets contribute only 15% of sales.

Source: Deutsche Bank

Cummins, one of the largest manufacturers of diesel and natural gas engines, EPS: $3.36 vs $2.42 expected.

  • Revenue $5.1bln vs. $4.5bln expected.

  • This strong performance was “driven by increased Engine segment demand in China and stronger component segment demand in China and India.”

  • Announced a “hydrogen day” for Nov. 16 to discuss the future of heavy duty trucking.

ServiceNow, maker of workflow software, EPS of $1.21 vs $1.03 expected on revenue of $1.15bln.

  • “Covid is redefining the future of work, accelerating digital transformation and amplifying the need to unify systems, silos, and processes into holistic enterprise workflows.”

  • “Companies have a need for speed right now that they’ve never had before, to hire new people, on board them and give them the tools to do their job.”

Out with the old, in with the new:

Microsoft (NASDAQ: MSFT): Fiscal 1Q EPS of $1.82 vs $1.54 expected.

  • Revenue of $37.2bln, +12% y/y vs $35.72bln expected.

  • Net income of $13.9bln, +30% y/y.

  • Microsoft realized revenue growth in all three of its business segments, but investors in recent years have taken a keen interest in the company’s cloud-computing business.

    • Revenue in Intelligent Cloud was $13.0bln, +20% y/y.

    • Server products and cloud services revenue +22% y/y and Azure revenue +48% y/y.

    • “Demand for our cloud offerings drove a strong start to the fiscal year with our commercial cloud revenue generating $15.2 billion, up 31% year over year”

  • Cloud computing has grown into a vast ecosystem of services and as a result has given rise to a multi-billion dollar economy. Of the industry’s giants, Microsoft has proved a resilient competitor in the space and has made it clear that they intend to continue to leverage their capabilities to further innovate within this space.

Visa (NYSE: V): Fiscal 4Q EPS of $0.97 falls short of $1.09 expected. Compared to $1.34 last year for the same period

  • Revenue of $5.1bln, -17% y/y from $6.14bln last year.

  • Net Income of $2.1bln.

    • Despite Visa’s growth in payments volume and processed transactions, earnings showed a persistent weakness in travel-related spending with cross-border volume -29% y/y.

    • Cross-border volume excluding intra Euro at -41% y/y.

  • Cross-border spending typically delivers higher yields for Visa, so the slowdown is creating “a drag on revenue growth, which will continue into fiscal year 2021.”

    • In the prior week American Express warned that they did not think business travel would pick up before 2022!

Amazon (NASDAQ: AMZN), stellar performance. EPS of $12.37 vs $7.41 expected.

  • Net Sales of $96.1bln vs $92.7bln expected, +37% y/y.

  • Net Income of $6.3bln vs $6.2bln expected, +197% y/y.

  • Amazon Web Services (AWS) Net Sales +29% y/y. This is Amazon’s highest-margin business segment (AWS is Amazon’s cloud business).

    • Net Sales of 11.6bln, a slight increase from previous earnings release.

  • Third-party sellers surpasses $3.5bln in sales on Prime Day, representing a 60% increase y/y.

  • Amazon’s core retail business is expected to continue to grow as we move into the year-end as covid restrictions persist.

    • Amazon recently announced plans to hire 100,000 seasonal workers to support the holiday shopping spree.

Apple (NASDAQ: AAPL): EPS $0.73 vs $0.70 expected.

  • Revenue $64.7bln vs $63.7bln expected.

    • iPhone revenues continue to disappoint at $26.44bln vs $27.93bln expected, and the sales were -20.7% y/y, partially driven by a later than normal iPhone release cycle this year.

    • Wearables, Home and Accesories at $7.88bln, +20.9% y/y.

    • Mac and iPad revenues also grew by 28% and 46%, respectively. This increase was driven by work-from-home trends.

  • Sales in China have been a weak for Apple this year at $7.95bln, -29% y/y.

  • Services at $14.5bln, +16% y/y representing solid growth for services which include iCloud, Apple Music, and fees from the App Store paid by app developers.

    • Apple’s recently announced a bundled version of its subscription services (Apple One) and the recent announcement of Apple Fitness+ are expected to help bolster this segment’s overall revenue moving forward.

Google (NASDAQ: GOOG) strong quarter: Q3 EPS $16.40 vs $10.12 compared to last year.

  • Revenue $46.2bln, +14% y/y.

  • Net Income $11.25bln, +59% y/y.

  • Google’s business segments all realized strong returns throughout Q3:

    • Google Advertising: $37.10bln, +9.8% y/y.

      • Google Search revenue $26.34bln, +6.5% y/y.

      • YouTube Ads: $5.04bln, +32.4% y/y.

      • Google Network: $5.72bln, +8.9% y/y.

    • Google Cloud: $3.44bln, +44.8% y/y. Cloud revenues continue to perform strong in line with industry trends in this space.

Facebook (NASDAQ: FB) EPS $2.71 vs $1.91 expected, strong despite a decrease in users in the US and Canada

  • Revenue $21.47bln vs $19.8bln expected.

  • Net Income $7.85bln, +29% y/y.

  • Daily Active Users (DAU) 1.82bln vs 1.79bln forecast .

    • Montly AUs: 2.74bln vs 2.70bln forecast.

    • Daily and monthly active users in the US and Canada declined slightly in the Q3 and it expects this trend to continue, no numbers provided.

  • StopHateForProfit, 2020 Facebook ad boycott did not seem to impact the company’s advertising business, with ad revenue +22% y/y and +16% q/q.

    • Facebook now has 10mln active advertisers, up from 9mln in July.

  • Facebook has spent a considerable amount of capital in Research and Development: $13.24bln YTD compared to last year’s $9.72bln for the same period.


Vice-President of the European Commission, Josep Borrell, and US Secretary of State Mike Pompeo, met via telephone on October 23rd to discuss a range of issues

  • The discussion primarily focused on China with the intention of deepening the US-EU cooperation and long-term engagement.

  • “I’m sure that my meetings will also include discussions on how free nations can work together to thwart threats posed by the Chinese Communist Party.” -Mike Pompeo

  • During this press meeting, Secretary Pompeo highlighted the PRC’s recent issuance of their environmental ‘fact sheet’ and noted that “The PRC is the world’s largest emitter of greenhouse gases, bar none - number one.”

  • Pompeo announced that the State Department will designate the US operations of six China-based media companies as foreign missions, ensuring “American people, consumers of information, can differentiate between news written by a free press and propaganda distributed by the Chinese Communist Party itself.”

Secretary Pompeo also announced that the US and Japan have held the first ever consultations for a new host nation support agreement by which Japan will take on its share of the cost of stationing US forces in the country.

  • Japan’s financial contribution for hosting US bases is agreed upon every five years, with the current arrangement set to expire in March of 2021.


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