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U.S. stocks climbed to an almost six-week high amid a rally in giant technology companies as traders awaited earnings from banks and news on a fresh round of economic stimulus.

The S&P 500 extended gains into a fourth day, while the NYSE FANG+ Index of megacap tech shares rose 2.2%. Amazon.com Inc. surged before its Prime Day event, Apple Inc. jumped as its price target was raised by RBC Capital Markets while Twitter Inc. rallied after Deutsche Bank recommended buying the stock. As lenders including JPMorgan Chase & Co. and Wells Fargo & Co. report their results this week, analysts expect a slight uptick in net charge-offs with some loans souring. Energy shares underperformed as oil sank below $40 a barrel. The Treasury market is closed for a U.S. holiday.

Prospects for another round of fiscal spending remain highly unsettled after President Donald Trump pulled out of talks on Oct. 6, hours after Federal Reserve Chairman Jerome Powell urged lawmakers err on the side of doing more rather than less to help the economy heal from Covid-19. The White House subsequently proposed a new $1.8 trillion stimulus package, with Trump himself saying he wanted to go even further, and negotiations with Democrats are expected to continue this week.



chart: S&P 500 climbs to highest level since early September


© Bloomberg
S&P 500 climbs to highest level since early September

“The stimulus stalemate still looms large, though it failed to derail the market,” said Chris Larkin, managing director of trading and investment product at E*Trade Financial. “And with high expectations for big-bank earnings kicking off the season, we could get a clearer picture into just how far we’ve come in terms of economic recovery.”

U.S. voters are getting their first close look at Judge Amy Coney Barrett in hearings that began Monday and are all but certain

Today’s Big Picture

Equities in Asia started the week off mostly higher, led by the 2.2% and 2.6% moves higher in Hong Kong’s Hang Seng and China’s Shanghai Composite, respectively. By mid-day trading, European equities were mostly higher as well, and U.S. futures point to a flat market at the open. The U.S. bond market is closed today.

There are four main drivers of equities this week:

  • First is the ongoing fiscal stimulus talks in the U.S., which in our view, look increasingly less likely to result in a deal before the 2020 U.S. presidential election on November 3.
  • The second will be the onslaught of corporate earnings reports this week, particularly for financial firms and large banks. Comments surrounding loan growth, consumer borrowing levels, and the like will be a keen focus as investors revisit growth prospects for the second half of 2020 and consumer spending prospects ahead of the year-end holiday shopping season.
  • The third will be Apple’s (AAPL) “Hi, Speed” event slated for tomorrow, October 13, at which it is widely expected to unveil the 5G iPhone.
  • The fourth is Amazon’s (AMZN) 2020 Prime Day event, which was postponed from its usual time thanks to the pandemic.

As for earnings, Data from FactSet sees the S&P 500 constituents delivering EPS of $33.30 for the September quarter, up dramatically from $28.22 in the June quarter but down considerably from the $42.21 earnings in the September 2019 quarter. With the coronavirus resurgence, we suspect investors will be closely scrutinizing and parsing management comments to determine if the rebound in corporate earnings for the December quarter will materialize as expected. That answer will help shape the next move in equities.

Data Download

Coronavirus

According to a study published last Friday of 1,062 patients in the New England Journal of Medicine,

BEIJING (Reuters) – China’s exports likely posted a fourth straight month of gains in September as more trading partners reopened their economies, a Reuters poll showed, while imports are also expected to have edged back into growth.

Exports have not been as severely affected by the global slowdown as some analysts had feared, due in part to record shipments of medical supplies and robust demand for electronic products, adding to hopes for a sustained economic recovery.

In September, exports are expected to have risen 10% from a year earlier, according to a median estimate of a Reuters poll of 24 economists. Imports likely rose 0.3% on year, improving after back-to-back decline in July and August.

Exports in August rose a solid 9.5% year-on-year, the strongest gain since March 2019.

Stronger exports could signal a faster and more balanced recovery for the Chinese economy, which is rebounding from a record first-quarter slump thanks to domestic stimulus measures.

A manufacturing survey showed total new orders in September recorded the strongest increase since January 2011, and a gauge for new export orders–which were hit hard by the global outbreak of the coronavirus–rose at the fastest pace in over three years.

“We expect both export and import growth to accelerate further in September. Global growth has continued to recover and strong global housing activity in recent months should support Chinese exports of furniture and appliances,” Goldman Sachs analysts said in a research note last week.

“Import growth may improve in September as well on the back of the solid expansion of domestic activities,” they said.

However, external demand could suffer if virus control measures are re-imposed by trade partners due to a resurgence in infections.

China is meanwhile looking to reduce its reliance on overseas markets for development as U.S. tensions and the pandemic

The headlines make the situation seem like a curiosity.

For investors, Wall Street analysts, and even some financial journalists, the reality of the damage to the economy, several weeks after the initial round of fiscal support expired, may indeed seem like a spectacle.

But it’s not that way for millions of Americans out of work or struggling to pay the rent or buy food in the wake of this year’s coronavirus pandemic.

It may not need saying that the longer the economy goes without another financial aid package, the worse the situation may become. But some analysts increasingly think it will also soon start to make an impact where it cannot be ignored: in the financial markets.

“Stimulus is the wrong word for this,” said David Rosenberg, a long-time strategist now running his own firm, Rosenberg Research. “This not classic Keynesian stimulus. It’s a lifeline to get us through. The stimulus has become what the Phase One Trade deal was last year.”

Week after week, roughly 800,000 Americans file for first-time jobless benefits, the springtime Congressional stimulus money has run out, and things are generally growing more dire for businesses and households, Rosenberg thinks. “If they don’t pass some sort of bill quickly, how many businesses will go under, how many missed payments will we see on rent, debt service, and utilities? The next few months are really critical. I’m quite amazed that there’s quibbling over a hundred billion dollars here and there with so much at stake.”

See: Yes, the U.S. economy really does need more fiscal stimulus – and the stock market knows it

It’s important to note that Rosenberg and other analysts do believe that some sort of stimulus package will be enacted eventually. And so does the stock market, which has been gravitating toward areas investors

My Friday column is divided into two sections. The first uses the long-leading, leading, and coincidental format developed by Arthur Burns and Geoffrey Moore to determine the current economic trajectory. The second looks at the markets.

Long-Leading Indicators

Financially, the economy is in good shape:

The Fed has been pumping cash into the economy (left). The Fed’s credit market support programs have lowered financial stress; the BBB yield (right) has dropped to 5-year lows.

The earnings picture is improving — but remember that word is clearly relative (emphasis added):

The expectation is for total S&P 500 earnings to decline -22.8% from the same period last year on -2.9% lower revenues. This would follow the -32.3% decline in Q2 when economic and business activities came to a halt as a result of the pandemic-driven lockdowns.

The earnings outlook has been steadily improving since the start of Q3, as economic and business activities have resumed. While the latest labor market and factory sector readings suggest some deceleration in the recovery, the recovery is nevertheless in place which should sustain the improving earnings trend.

This means there is a growing possibility of upside earnings surprises along with analysts combing through earnings calls looking for positive commentary.

Leading Indicators

Let’s take a survey of the positive data:

New orders for consumer durable goods (left) and non-defense capital goods excluding aircraft (right) have completely rebounded.1-unit building permits (left) are at their highest level in five years . Average weekly hours of non-supervisory manufacturing employees rebounded but last month trended sideways. Still, the overall trend is positive. Financial markets have healed. The treasury market spread (left) is positive while the stock market (right) has rebounded.

The one very negative statistic is the 4-week initial average of unemployment claims:

The 4-week moving average of initial unemployment