The stock market had a bad week. At least it wasn't a terrible one.

  • By Ben Levisohn,
  • Barron's
  • Facebook.
  • Twitter.
  • LinkedIn.
  • Print

The stock market lived to fight another day.

Yes, it was another losing week. The S&P 500 (.SPX) fell 0.6% to 3298.46, its fourth consecutive week of losses, while the Dow Jones Industrial Average (.DJI) dropped 483.46 points, or 1.7%, to 27,173.96, and the small-company Russell 2000 (.RUT) slumped 4% to 1474.91. Only the Nasdaq Composite (.IXIC), up 1.1% at 10,913.56, managed to escape the week with gain.

That right there tells you everything you need to know. In a week filled with headlines about government stimulus (or the lack thereof), Supreme Court nominations, and the election, the gain in the Nasdaq—home to stay-at-home stocks such as eBay (EBAY), PayPal (PYPL), and Nvidia (NVDA)—suggests that it was the fear of another Covid-19 wave that really got the market down.

And for good reason. The week began with the U.K. talking about a second shutdown and ended with all of Europe facing down a second wave of infection as France reported its highest number of daily cases and other countries reported spikes as well. In the U.S., the number of cases is rising and the death toll passed 200,000 midweek, leading to the possibility of new shutdowns and sending investors scurrying for safe-haven stocks over recovery plays. Amazon.com (AMZN) finished the week up 4.8%, Apple (AAPL) finished up 5.1%, and Microsoft (MSFT) closed up 3.7%, while recovery plays Dow (DOW) fell 8.6% on the week and Chevron (CVX) dropped 8.2%.

“Stay-at-home stocks are leading, and economic-recovery stocks are getting clobbered,” says Dave Donabedian, chief investment officer at CIBC Private Wealth Management. “There’s some repositioning going on here that says there will be a pullback in the economy, at least in the short term.”

But repositioning is far different than selling in bulk. Sebastien Galy, senior macro strategist at Nordea Asset management, observes that with so many megacap stocks sitting near key price support levels, a break lower could have caused everyone from individual investors, hedge funds, and mutual-fund managers to start bailing out on stocks. In other words, as Galy puts it, “that depends on someone panicking.”

No one panicked. On Monday, the S&P 500 came ever so close to finishing the day in correction territory—down 10% from its all-time high—but fought its way back, and attempts to close below 3222.76 later in the week also failed. The Nasdaq-100 also began the week near important support levels, but held. “The market as a whole has shown it can hold when and where it has needed,” says Frank Cappelleri, executive director at Instinet.

Now the narrative needs to change. The current downdraft began simply as a shift away from tech, which had gotten overvalued, but the more the market has dropped, the more the risk narrative has shifted, says Barry Knapp, director of research at Ironsides Macroeconomics. Fears of renewed waves of Covid-19 infections, a less-than-smooth election, and a weakening economy all become more real as the market slips. “Like many equity market corrections, what began as a positioning rationalization evolved into a fundamental deterioration narrative,” Knapp writes.

There has been some deterioration in economic indicators, but mainly there’s fear that the economy will weaken too much without another round of fiscal stimulus that so far hasn’t been forthcoming from Congress. It’s possible, though, that the market really doesn’t need another relief package. The level of stimulus has already dwarfed what was done during the financial crisis, and it’s unlikely the market would have waited this long to start worrying about the lack of one, when it was obvious months ago that Republicans and Democrats wouldn’t be able to agree on a deal.

“It makes no sense to argue that forward-looking markets would ‘wait for a month’ before pricing in the impasse in Washington, D.C.,” writes MKM Investment Partners’ Michael Darda. “We believe it is best to use pullbacks and corrections to add to risk asset/recovery exposure even if it feels like the wrong thing to do.”

And maybe what feels like the wrong thing will turn out right. Perhaps the election won’t be as big a hiccup as the market fears. Goldman Sachs’ currency team suggested that “the market appears to be pricing too high of a probability that it will take a long time to sort out the winner”—and the economy will continue to heal, even if the pace of the recovery will certainly decelerate.

“It’s not that it won’t slow,” says Leuthold Group strategist Jim Paulsen, “but it will slow to a healthy rate overall.”

And perhaps that will be enough.

  • Facebook.
  • Twitter.
  • LinkedIn.
  • Print

For more news you can use to help guide your financial life, visit our Insights page.


Copyright © 2020 Dow Jones & Company, Inc. All Rights Reserved.
Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. A percentage value for helpfulness will display once a sufficient number of votes have been submitted.
close
Please enter a valid e-mail address
Please enter a valid e-mail address
Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Your e-mail has been sent.
close

Your e-mail has been sent.

You May Also Like...

Making sense of Medicare coverage options

When you become eligible for Medicare, you'll have an alphabet of coverage options to consider. Learn how to decode the assortment of important choices.

8 top-performing closed-end funds

Often misunderstood, CEFs are open to new investors, trade like stocks and pay distributions. Here are examples of funds in eight categories that were among the top performers.

Top 5 technology investing articles of the week

This weekly interactive guide to our most popular technology investing stories is designed to help you make smarter decisions when investing in this sector.