Dow Rebounds 400 Points On Election Eve—But There’s Still A Long Way To Go For A Recovery

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Topline

Stocks added back some of their past week’s losses on Monday, but even as volatility expectations soften one day before the U.S. presidential election, experts are still eyeing ramped-up volatility given the possibility of a contested election.

Key Facts

The Dow Jones Industrial Average ended Monday up 422 points, or 1.6%, after tanking 1,800 points last week; meanwhile, the S&P 500 climbed 1.2%, and the tech-heavy Nasdaq, which led Friday losses, also added back about 0.4%.

Despite falling Monday morning amid renewed fears that international lockdown measures could curb demand, oil prices also rebounded by market close, with the price of West Texas Intermediate futures, the U.S. oil benchmark, adding 3% by day’s end, though it’s still down 5% over the last week.

Yields on the ten-year Treasury Bond—a bellwether of investor confidence that’s struggled to recover from historic lows during the pandemic—were down about 4% on Monday morning to 0.845%, wiping out gains that helped push the indicator to a four-month high on Friday.

Shares of Clorox, meanwhile, climbed about 4% after the cleaning products maker reported quarterly earnings before the opening bell that far surpassed analyst expectations, including sales of $1.9 billion that soared nearly 30% from last year; its shares are now up more than 36% this year.

Estée Lauder and Marathon Petroleum were also among firms reporting better-than-expected financials on Monday morning; their shares climbed 2% and 6%, respectively.

Global markets similarly edged up on Monday: The United Kingdom’s FTSE 100 was up 1.3%, France’s CAC 40 2.1% and Japan’s Nikkei 225 1.4%.

Crucial Quote 

Morgan Stanley said Sunday that newly imposed lockdowns in Europe have stifled its global market outlook, as surging coronavirus cases dim domestic prospects, but not everyone’s bearish. “Even as Europe imposes new restrictions to blunt the spread of the coronavirus, the 50 U.S. states have shown little movement toward another shutdown,” says Marc Chaikin, the founder of Philadelphia-based quant research firm Chaikin Analytics. “We are likely to see renewed safety measures involving masks and social distancing, particularly amongst the most vulnerable, but with the death rate curve thankfully showing only a very modest increase, business in the U.S. will continue to improve . . . Investors should key in on improving earnings guidance and economic reports, which show a steady recovery from the Covid-19 induced recession lows.”

What To Watch For

Election results—and when we get them. Experts have warned that a contested election could further ramp up uncertainty, which could naturally heighten market volatility, and Chaikin expects such an outcome would take one to two weeks to resolve: “The market will be volatile with a downward bias as the post election angst plays out,” he says. “Expect a better market as we come out of this election uncertainty.”

Tangent

One of the Federal Reserve’s eight annual Federal Open Market Committee meetings—during which policymakers give key guidance on monetary and fiscal policy—is slated to be held on Wednesday and Thursday. Morgan Stanley said in a weekend note that it’s unlikely policymakers will “soften their call for additional fiscal support” at the meeting, adding that despite a better-than-expected recovery, and a return to pre-Covid economic levels that could happen in the second quarter, “Policymakers have not let this economic momentum distract from the deep structural problems, particularly in the labor market, that could unfold over the longer run in the absence of further fiscal support.”

Key Background

Though the VIX (a measure of 30-day volatility expectations) ticked down about 0.2% on Monday, volatility has been at a four-month high in the days leading up to the U.S. presidential election, as the threat of surging coronavirus cases compounds market uncertainty and detracts from a slew of better-than-expected earnings results. Three weeks into third-quarter earnings season, 70% of S&P 500 companies have beaten Wall Street earnings expectations–the highest rate since at least 1998, Goldman Sachs noted in a weekend note, adding that “investors are not rewarding earnings beats this quarter.” Positive earnings announcements historically lead to stocks outperforming the market the day after reporting, but this year, according to Goldman, they‘ve actually led to underperformance. 

Further Reading

Here’s Why Oil Prices Are Plummeting Again (Forbes)

Dow Tanks 1,800 Points On The Worst Week For Stocks Since March—Just Four Days Before The Election  (Forbes)