Stocks Still Laser Focused On Stimulus Possibilities
Another Factor Day
The stock market has had many factor days this year. A factor day to me is when there is a large dispersion among returns in different factors. You know the drill. Large cap growth stocks have been inversely correlated at times with small cap value. You can see the daily performance spread between the Russell 1000 value and growth has been high in the past few months just like it was in the late 1990s and early 2000s during the tech bubble boom and bust.
There are obviously other factors, but these are the two everyone is focused on in 2020. It’s essentially tech and healthcare companies versus energy and banks. A rally in tech has gone on for so long and has been so powerful, even smallish companies have large market caps. On the other hand, many banks and energy companies have become small caps. There are very few large cap oil producers left.
President Has COVID-19 Symptoms
At first, it seemed like the entire market was going to crash after we found out President Trump tested positive for COVID-19. The futures market sold off about 2% across the board. That was a mirage as the market switched during the trading session.
Small cap value stocks did well and large cap growth stocks did poorly. It’s possible that Trump’s contraction of COVID-19 makes the GOP more likely to pass a stimulus. This could make them take the problem more seriously and it could make them want to do something to alter the polls.
Generally, when a candidate has health issues, he/she falls in the polls. The best example is when Bernie Sanders had health issues last year, he dropped in the primary polls for about a month. It's unlikely that President Trump will face any major health issues because he has the best doctors in the world. And the market agrees with me which is why it traded as if the stimulus became more likely.
If the market thought the President was in trouble, there would be a sharp decline even worse than the 2% decline after hours on Thursday night. The election would become uncertain and obviously, the current government would be in flux.
Obviously, the media is overplaying its hand with this story because it generates eyeballs. It's apparent that the market, won't make any changes until it sees evidence he’s dealing with severe complications. As for now, he only has a low grade fever which wouldn’t even be news if it wasn’t COVID-19 related. Vice President Pence and Joe Biden tested negative which is a good sign.
Details Of Friday’s Trading Action
S&P 500 fell 96 basis points and the Nasdaq fell 2.22%, but it was a good day for most stocks outside of the big cap tech firms. Equal weighted S&P 500 was up 0.4% and the Russell 2000 was up 53 basis points. This was the 3rd worst day for the Nasdaq versus the S&P 500 this year. It all stems from the hopes for a stimulus.
Even the 10-year bond yield increased which is a rare event. The 10-year yield was up 2.3 basis points to 69.8 basis points. We all remember on Tuesday when some people claimed the 10-year yield was making a new low. Some said it was still within its range. It’s highly unlikely the 10-year yield falls below 50 basis points. Another more deadly strain of COVID-19 would need to spread rapidly.
Zoom ZM had a massive reversal as it closed down 16 basis points which was 4.68% from its record. Apple AAPL and Netflix NFLX were down 3.23% and 4.63%. Cloud ETF fell 16 basis points, while the regional bank ETF was up 2.84%. It was a great day for small cap value versus the Nasdaq 100 as small cap value rose 1.61% and the Nasdaq 100 fell 2.81%.
Tesla Disappoints Investors
Friday was a terrible day for Tesla TSLA which fell 7.4% on the news of its disappointing Q3 deliveries. Tesla picked a bad day to report weak numbers because most growth tech stocks did poorly. Specifically, Tesla delivered 139,300 vehicles and produced 145,000. It beat estimates for 134,720 deliveries, but that’s only because those estimates were sharply lowered in the past couple weeks. The market realized what was going on which is why the stock fell.
Tesla had 124,100 Model 3 and Y deliveries which missed estimates for 128,000. Model Y was supposed to be Tesla’s most popular car, but it doesn’t look great now. That’s because the Model Y is only marginally different from the Model 3. It’s the hatchback version, but more expensive. Tesla should have made the Model Y slightly bigger and redesigned it to make it a truly different vehicle.
COVID-19 Update
Friday was a pretty great day for COVID-19 numbers because there were 1.119 million tests as the chart below shows. That’s a new record. Despite such a high number of tests there weren’t that many new cases. 7 day average of new deaths fell to a new low.
According to Worldometers, it fell to 726 which is the lowest since July 10th. A big worry is hospitalizations. Unlike in May and July, the 7-day average isn’t spiking that quickly. However, we don’t want to see it rising at all because that means the 7 day average of new deaths will eventually increase.
(Click on image to enlarge)
Conclusion
President Trump’s positive COVID-19 test sent the futures market 2% lower, but that didn’t last. Instead only large cap growth stocks fell, while small cap value stocks rose. The 10-year yield increased slightly. It was a terrible day for Tesla because of its weak delivery result.
Frankly, it's surprising that it didn’t fall more than 7.4%. that result breaks the growth story entirely. It can fall another 20% in the near term. COVID-19 testing hit a new record on Friday which gives me hope that Abbott’s tests are finally being given out in mass. We can still expect the 7-day average to rise to 1.5 million by mid-October.
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