* U.S. equity indexes rally on stimulus optimism, but pare gains into close
* Nearly all S&P sectors end green; energy, financials, comm svcs up most
* Staples sole loser
* Dollar dips; gold, crude gain; US 10Y T-note yield ~0.80%
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STOCKS END HIGHER, BUT LOSE STEAM INTO THE CLOSE (1615 EDT/2015 GMT)
The major averages rallied Tuesday on growing optimism that talks among U.S. lawmakers are
progressing with respect to a U.S. stimulus package aimed at cushioning the economic shock from
the coronavirus pandemic.
That said, after being up about 1.5% in mid-afternoon trade, the S&P 500 gave back a
sizable portion of its gains, ending up only about 0.5%. The Dow and Nasdaq Composite
lost about two-thirds of their gains as well.
Nevertheless, the Nasdaq was able to end its five-day losing streak.
Meanwhile, although stocks pared gains sharply, the U.S. 10-Year Treasury yield,
at about 0.80%, is registering its highest close in more than 4 months.
Here is your closing snapshot:
MARKET ELECTION TEA LEAVES LOOK MUSHY (1339 EDT/1739 GMT)
While strategists examine markets and the economy for clues about the U.S. election, they're
getting blurry readings ahead of the Nov. 3 showdown.
During a virtual event on Tuesday, Jeffrey Schulze, investment strategist at ClearBridge
Investments in New York, discussed the past and what the market is saying right now.
Since World War II the only presidents who didn't win a second term were the ones that went
through a recession within two years of election day and saw a material rise of the unemployment
rate the year of the election, according to Schulze.
So 2020's deep, but short, recession and the 11.2% rise in the unemployment rate "would bode
well for a Biden presidency."
But he also says "pocketbooks not politics typically win elections." When real per capita
disposable income in an election year rose less than 1% the incumbent party lost. But despite
this year's recession and high unemployment, U.S. consumers actually saw a 3.2% increase in
disposable income so far this year thanks to government stimulus, according to Schulze who says
he was referring to data from the Bureau of Labor.
So what does the stock market tell us?
"Historically if markets have risen in the three months prior to election day that has meant
that the incumbent party would retain control of the White House," Schulze said adding that the
market correctly predicted every election since 1984 and was right 86% of the time since 1936.
But this time around "you've seen much more cyclicality priced into different asset classes"
with the small cap Russell 2000 outperforming the large cap Russell 1000 index.
The RUT is on track for a 10.2% gain for the three months up to the end of October while the RUI
is on pace for a 6.8% gain.
"This all suggests a Democratic sweep where you're going to have a larger front-end stimulus
package come to the U.S. economy," says Schulze. So he says: "You're getting conflicting signals
from the market."
Except he sounds confident that "we're going to get higher volatility to, and through,
Meanwhile stocks are rallying Tuesday as U.S. House Speaker Nancy Pelosi said that she was
optimistic Democrats could reach a deal with the Trump administration on additional COVID-19
relief that could get aid out by early next month.
C-SUITE SENTIMENT BOUNCED BACK IN THE THIRD QUARTER (1230 EDT/1630 GMT)
The top brass at American companies turned their collective frowns upside-down between July
1 and September 30, once again calling the glass 'half full.'
CEO optimism surged past pre-pandemic levels in the third quarter to its highest number
since Q1 2018, according to the joint report from the Conference Board and the Business Council.
Corporate chiefs had a significantly brighter view of current economic conditions, bouncing
from Q2's pessimistic reading of 13 to a relatively lofty 64, the rosiest in over two years.
A CEO Confidence number over 50 indicates optimism.
Improved capital spending plans were a major driver behind the 19 point jump in the overall
confidence index, with 25% of survey participants anticipating increased capex over the next 12
months and 36% seeing upward revisions in spending plans over the next three years.
Still, 37% planned to reduce their capital budgets in the year ahead.
Employment was another cloudy spot, with hiring plans cooling down and 34% seeing net
headcount reductions in the cards. And the economic slowdown has respondents temporarily cutting
wage increases and considering pay cuts.
"CEOs across industries continue to adapt to COVID-19's new normal," said Roger Ferguson,
Jr., vice chairman of The Business Council. "While Q4 saw a resurgence of optimism, leaders are
also cognizant of—and planning for—what may be permanent shifts in consumer preferences and
organizational expectations ahead."
The chart below shows, unsurprisingly, that prolonged periods of CEO pessimism can be a
harbinger of recession, as was the case before the pandemic tossed the U.S. economy into
STOCKS PUMP UP ON STIMULUS HOPES (1147 EDT/1547 GMT)
Wall Street's major averages are higher in late morning trade as investors hope for more
stimulus from Washington.
Senate Republicans are preparing to vote on a bill to help small businesses hammered by the
COVID-19 pandemic, while U.S. House Speaker Pelosi, and Treasury Secretary Mnuchin try to narrow
differences on aid bill.
With Tuesday's rally, the Nasdaq Composite is on track to end its 5-day losing
streak. The Nasdaq last fell 6 straight days in late-July/early-August 2019.
Nasdaq is higher, with four of its "Big-5" (Apple, Microsoft, Amazon.com
, and Facebook) posting slight gains. Just Alphabet is trading off
modestly after the Justice Department filed a lawsuit against Google.
Regarding this, Kim Forrest, Chief Investment Officer at Bokeh Capital Partners said, "In
the short term it doesn't mean anything to investors. In the longer term this is just one more
shot at the tech oriented media platforms … this is just one more arrow legislators and
regulators are going to be able to throw at electronic or internet advertising platforms. Are
advertisers going to go elsewhere? I say no because that's where the eyeballs are for better or
Forrest added, "For the short and medium term, investors are going to yawn their way through
Here is where markets now stand:
(Terence Gabriel, Sinéad Carew)
VALUE: ANOTHER DAY, ANOTHER CALL (1045 EDT/1445 GMT)
Maybe they're just simply too cheap to ignore but the temptation to jump into Value stocks
seems to be spreading quite widely.
Numerous analysts on the sell-side have already advised their clients to look into a
rotation into the cheaper segment of the market, but their enthusiasm seems to be getting across
to the buy-side.
"We believe it may be time to shift towards value", Amundi analysts wrote in a strategy note
dedicated to the U.S. market.
First of all, they note the record valuation gap between Value and Growth stocks and the
possibility that the outperformance will probably not last forever.
Why not? Well, the reflation trade getting into motion just might put an end to the absolute
dominance of tech for instance.
"Historically, value has outperformed growth during inflationary periods", the Amundi
analysts argue, adding they expect that "quality value stocks that can manage through this
difficult economic period, could benefit as the U.S. and the global economy rebound and
Three risks are clearly identified, however, for investors looking into the rotation into
1) A sluggish recovery weighing on interest rates and pushing investors to stick to growth
2) Persistent structural headwinds for value stocks (airlines, department stores)
3) A Biden victory hurting financials and energy stocks
So Amundi isn't advising to go all in Value but rather to take a cautious approach.
"We believe increasing exposure to both high-quality value stocks and growth stocks may be
prudent, while reducing exposure to hyper-growth and deep-value stocks".
HOUSING STARTS, BUILDING PERMITS: BACK TO BUBBLE TERRITORY (1000 EDT/1400 GMT)
Data released on Tuesday showed single-family home starts and building permits bounced back
in September to their highest levels since 2007, just as the housing bubble was getting close to
Ground breaking on new U.S. homes bounced back in September according to the
Commerce Department, rising 1.9% to 1.415 million units on a seasonally-adjusted, annualized
While analysts forecast a slightly higher 1.457 million units, the surprise August decrease
was deeper than the 5.1% previously reported, revised to a steeper 6.7% drop.
Building permits, often considered a harbinger of future housing market
activity, jumped 5.2% to a better-than-expected 1.553 million units SAAR.
With this report, building permits join other housing sector indicators at pre-pandemic
And behind the headline number is some even brighter news, as Nancy Vanden Houten, lead U.S.
economist for Oxford Economics points out:
"A decline in starts in the volatile multi-family sector held back overall starts to a gain
of just 1.9%, but single-family starts rose to their highest level since June 2007," Vanden
Houten writes. "Building permits, the more forward-looking gauge of residential construction,
rose to their best level since March 2007."
The data comes on the heels of Monday's report from the National Association of Home
Builders, which showed homebuilder sentiment reaching a new, all-time high this month.
Record low mortgage rates and the new work-from-home normal has prompted a flight to the
suburbs and a spike in demand, helping the housing sector come roaring back even as the broader
economy stumbles in its wake.
While the market likely paid little heed to the upbeat data, it is nevertheless solidly
green out of the starting gate as Senate Republicans prepare to vote on a stimulus bill as House
Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin return to the ring to wrestle through
differences on a larger, more comprehensive pandemic relief bill.
NASDAQ 100: IS VOLATILITY OF VOLATILITY ABOUT TO VAULT? (0915 EDT/1315 GMT)
The Nasdaq 100 has recently been on a slippery slope. Indeed, this index, dominated
by the tech titans, has fallen nearly 4% over 5 straight trading days.
Meanwhile, the Nasdaq 100 volatility index appears primed to rise, suggesting the
potential for greater instability. (Click on chart below)
The VXN's Bollinger Band (BB) width, a historical volatility measure, is now at 0.4 on a
weekly basis, which puts it below its January 2020 trough of 0.43, and at its lowest level since
September 2018, when it bottomed at 0.36.
In the wake of the implied volatility index's September 2018 and January 2020 BB width lows,
the VXN ultimately spiked and the NDX suffered severe declines.
Volatility of volatility could contract further, but in the event it starts to rise, the NDX
may quickly pick up speed on the downside.
FOR TUESDAY'S LIVE MARKETS' POSTS PRIOR TO 0900 EDT/1300 GMT CLICK HERE:
(Terence Gabriel is a Reuters market analyst. The views expressed are his own)
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