US Markets Tumble as Virus Resurges

Dow gives up all of October gains

It was a face-ripper in U.S. global equity markets to open the week as the S&P 500 had its worst day since September, tumbling nearly 2% as investors backed further away from risky assets. An unwelcome resurgence of the virus across Europe and the rural U.S. is bringing back fears of more lockdowns, business closures, and a dreaded double-dip recession. Stocks did bounce off their lows at the close, but the damage was deep.

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The election uncertainty isn't helping matters much either as polls are wavering with just over a week to go before Nov. 3. While some sectors have been reacting to a variety of election outcomes across the White House and Senate races, the overwhelming sentiment among investors is risk aversion. The more cases rise, the more investors look for cover in bonds and gold. We've seen this before in 2020.

S&P 500 vs. DJIA vs Nasdaq

Money has flowed out of recovery-related stocks like energy, industrials, and financials, where it had been building for the past several weeks as a broad-based rally was underway. Today's sell-off wiped away all the gains made in October for the Dow Industrials, and may scare investors from coming back in until the spread abates.

Alternative energy vs. energy price chart

Did Blue Wave Hopes Crash?

With just over a week to go before the election, it's hard to put too much stock in the polls, especially given their track record from the last election. But a lot of money has gone into sectors that investors deemed favorable to a Biden win with a Democratic majority in the U.S. Senate, aka a blue wave. Those sectors include green energy stocks, namely solar and renewables, given Biden's green energy plan. 

As the polls have narrowed a bit in recent days, including in the Senate races across key states, so has the gap between green energy stocks and traditional energy stocks (chart above). 

Number of guidance instances vs number of above-consensus guidance

Companies are Getting Optimistic

No one was listening today, but about one third of the companies in the S&P 500 have reported results from the past quarter so far, and the results have continued to surprise to the upside. That always happens – we know – but it's more significant in this uncertain environment than it usually is.

According to BofA Securities, reported earnings so far have topped consensus by a remarkable 18%, led by financials. Those rising bond yields have added some swagger to their step. Overall, consensus earnings have risen by 6% for the overall S&P 500, but are still down 17% year-over-year.

Breadth is Strong

So far, 69% of companies have beaten on both revenue and profit estimates – the strongest showing so far in the history of BofA's research. The weakness, as we know, has been in the energy and travel sectors, but they've even started to show improvement. 

Have Investors Tuned Out?

It's more likely that they have priced out these improvements, which explains why stocks had such a strong September. It's rare that better-than-expected earnings result in lower stock prices, but that has been the trend over the past two weeks – except for rare instances like Snap Inc. and Tesla.

So far this quarter, companies that beat on both top and bottom lines have underperformed the S&P 500 by 0.5% the day after, which is the worst one-day reaction to earnings beats in history. The last time this happened was in the height of the internet bubble in 1999.

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