Dow caps volatile October with worst weekly finish since March

The three major U.S. indexes closed out the final trading day of a turbulent October with more losses, capping a wretched week marked by a record surge in coronavirus infections, dashed hopes for an economic rescue deal before the election and renewed fears of a new wave of business disruptions.

The Dow Jones industrial average fell 157.51 points, or 0.6%, to close at 26,501.60. That gave the blue-chip index its worst week since March and its second straight monthly loss. The S&P 500 index tumbled 40.15 points, or 1.2%, to settle at 3,269.96. The tech heavy-Nasdaq gave up nearly 274 points, or 2.5%, to end at 10,911.59.

The blue-chip index moved into correction territory this week, after falling more than 10% from its February peak. October is typically the most volatile month for stock traders, although it has rewarded investors more times it has punished them.

The United States reported a record 90,000 new coronavirus infections on Thursday. The resurgence comes in the homestretch of the presidential campaign, amplifying a sense of unpredictability about the future of American politics and the government’s response to the pandemic.

President Donald Trump “would actually like to see a big stimulus package—however his incentive to pass fiscal stimulus goes away if he loses reelection,” said Kristina Hooper, chief global market strategist at Invesco. “So I think chances are slim to none—and slim may be leaving town right now.”

Governments abroad are also facing a resurgence of the virus that has rattled markets. France and Germany are reinstating business and social restrictions as sick patients fill intensive care beds and the rapid spread of infections strain the countries’ health-care systems. The German DAX is down 9% for the month, France’s CAC dropped 5%, and the Pan-European Stoxx shed 5.5%. Asian markets were more tempered, however, with the Shanghai and the Nikkei wiping gains for the month and finishing virtually unchanged from September.

The mismatch between strong corporate earnings in the past quarter and sinking stock prices reflects a gloomy outlook for the future, analysts say. While profits rose for many companies that have already reported earnings this quarter, investors fear that the worsening pandemic will keep some from building on their gains and crush those that just getting by.

Even the gargantuan earnings of U.S. tech giants could not stave off the souring investor sentiment. Apple, Facebook, Alphabet and Amazon collectively generated $38 billion in net profit this quarter. But investors appeared to poke holes in any perceived weakness, underscoring the sky-high expectations attached to the relentless gains these companies have racked up throughout the pandemic. Only Alphabet shares climbed after it reported earnings Thursday.

“It’s always about the future earnings and not the current earnings,” said Nick Raich, chief executive of the Earnings Scout, an independent macroeconomic research firm, based in Cleveland. Of the more than 300 S&P companies that have already reported financial results, 83% of them beat expectations to an extreme degree, surpassing forecasts by an average of more than 20%. But the rates that companies are projecting for future growth are slowing compared to past quarters, Raich said.

“We are facing potential virus fears increasing, plus no stimulus—that equals weakening earnings expectations and lower stock prices.”

Though the markets were previously propped up by a massive spending effort from Congress, GOP efforts to reach a stimulus deal with Congressional Democrats have failed. The Republican-controlled Senate adjourned until Nov. 9, signaling to investors that businesses and households would have to wait weeks and possibly months for another rescue package from Washington.

The delayed funds for desperate households and struggling businesses is amplified by the surge in new infections in every part of the country. Rising positivity rates and hospitalizations have raised concerns that local governments will be compelled to close businesses and issue stay-at-home orders in an urgent effort to suppress the spread of the virus. Without the safety net of heavy spending from Congress, investors are expressing fears that the fragile economic recovery will stumble.

The election adds to the uncertainty. For months Republicans have insisted on a smaller aid package, and the two parties have remained deadlocked. House Democrats passed a $2.2 trillion version earlier this month, over GOP opposition. Investors will have to game-out how various outcomes might further delay or fast-track an eventual stimulus or alter its size.

“If we see a blue wave, this could certainly alter the path of negotiations given the leverage Democrats will have going into 2021 and the increased prospects for a robust stimulus plan during Biden’s first 100 days as president,” said Nicole Tanenbaum, partner and chief investment strategist, at Chequers Financial Management. Conversely, she said, a GOP-controlled Senate could be less willing to negotiate with a Democratic president, ultimately leading to a smaller spending bill.

“Trying to anticipate President Trump’s actions or reactions has been fool’s work for four years,” said Michael Farr, president of Farr, Miller & Washington. “If he becomes a lame duck or if he is reelected he faces a future no longer concerned with reelection.”

In a Biden win, Farr speculates that a rescue package wouldn’t arrive until after his inauguration but that it would be “a big one.” If Trump is reelected, it’s likely Congress would settle a deal in December but it would be smaller than what House Speaker Nancy Pelosi, D-Calif., would want, he said. And in yet a third scenario, in which Trump is a lame duck president, Congress could pass a smaller package in December followed by a new spending proposal in the new year.

“Markets hate surprises,” Farr said, “and almost anyway you look at it, the next week and months to follow have a higher than average chance of seeing a make-you-jump event.”