When President Donald Trump tested positive for Covid-19, the news introduced a heap of uncertainty into the markets. This week, at least, stocks seemed to take the news in stride.
The Dow Jones Industrial Average rose 508.85 points, or 1.9%, to 27,682.81 for the week, while the S&P 500 index gained 1.5% to 3348.44, ending four-week losing streaks. The Nasdaq Composite advanced 1.5%, to 11,075.02.
Those gains came as politics stole the headlines. It was a week that saw a contentious debate that shocked viewers on both sides of the aisle, and ended with the president heading to the Walter Reed Medical Center on Friday. Both the debate and the positive test initially knocked the market down, but the big losses faded. The market had other things to worry about.
That would be another economic stimulus plan, and there was continued back and forth on whether Republicans and Democrats could reach a deal. Just the fact that the two sides were talking was better than no talks. The market just wants a boost for the recovering economy, though a deal still seemed out of reach at Friday’s close. “It’s something the market will have to deal with,” says Quincy Krosby, chief market strategist at Prudential Financial.
Let’s get one thing straight: The stock market wants a stimulus plan, but it doesn’t need one. The economy would likely continue to recover without it. Stimulus, though, would speed it up and limit the downside, says Chris Harvey, U.S. equity strategist at Wells Fargo Securities.“ If we get stimulus, it takes out some fear and risk,” he explains.
And all signs point to an economy that continues to get better, even if at a slower pace. Demand for homes remains off the charts. The Institute for Supply Management’s manufacturing survey dipped to 55.4 in September from 56 in August, but remained above 50, the level that signals continued growth in manufacturing activity.
The U.S. jobs report was weaker than expected, but private payrolls surprised to the upside in September. “The prevailing narrative is that the economy generally and the labor market particularly are losing steam,” writes Stephen Stanley, chief economist at Amherst Pierpont. “I don’t think the data quite bear that narrative out, at least with regard to the labor market.”
When in doubt, look to corporate earnings. Third-quarter earnings season really gets going in two weeks, when JPMorgan Chase (ticker: JPM) and other banks start reporting. But what we’ve seen so far looks pretty good. PepsiCo (PEP) gained 3.4% this past week after easily topping forecasts, while Bed Bath & Beyond (BBBY) soared 42% after turning a surprise profit. Meanwhile, earnings estimates continue to rise, and that bodes well for corporate profits.
“We expect the 3Q earnings delivery and outlook to remain constructive as earnings again come in ahead of expectations and balance sheet trends show further improvement,” writes Marko Kolanovic, global head of quantitative and derivatives strategy at J.P. Morgan.
Still, there’s that pesky election coming up in about a month. The good news is that it will pass, one way or another. “Election uncertainty is a near-term issue,” writes Mark Haefele, chief investment officer for global wealth management at UBS. “[Over] the medium term we expect sustained improvements in mobility based on the development of a vaccine, and the passing of additional U.S. fiscal stimulus to shift the economy toward ‘more normal.’”
As it is, the amount of risk investors have been pricing into the market is decidedly not normal. The Cboe Volatility Index, or VIX, has been trading well above 20 since the end of February, a sign that investors have been pricing in a higher-than-average level of risk for more than seven months now. VIX futures signal expectations for elevated volatility well into the new year. That suggests investors have positioned for the unexpected, of which the president’s positive test certainly qualifies. When you’ve already planned for the worst, it gets harder to meet that threshold.
The VIX at these levels implies average daily market moves of more than 1%, so recent swings shouldn’t be seen as out of the ordinary. For now, though, don’t be surprised if the S&P 500 remains stuck in a range between 3200 and 3400, according to Macro Risk Advisors technical analyst John Kolovos. “We remain buyers above 3200 support and suspect a trading range is developing,” he writes. “Price action above 3425 and we start to gain more confidence in the recovery.”
A little bit of confidence is something we could all use right now.
Write to Ben Levisohn at Ben.Levisohn@barrons.com