Retail Sales Impress Amid Concerns About a Second Wave

Stocks ended a three-day losing streak Friday, closing on a positive note to end another mixed week of trading. Stimulus negotiations bounced around for yet another week, as the prospect of sealing a deal before the Nov. 3 election looks less likely. The mixed week on Wall Street was also probably a reflection of the mixed news we tracked through the week. In Europe, a second wave of the virus appears to be growing. The U.K., France and Germany all imposed restrictions to slow the spread of the virus in the region. Cases are also accelerating throughout the U.S., with cases eclipsing 8 million last week. Employers continue to feel the impact, and initial jobless claims ticked higher.

But optimism about a vaccine continues to undergird markets, and we expect to see a trove of late-stage trial results in the coming weeks. Pfizer, for example, said it plans to apply for emergency use authorization for its vaccine candidate as soon as it reaches key safety milestones in late November. Retail sales and small business optimism also provided a counter narrative to negative headlines.

Like we said in our Q3 commentary, we’re aren’t out of the woods, but with each passing day the sun shines a little brighter through the tree canopy.

WALL STREET WRAP

Retail Sales Impress: Retail sales accelerated and beat expectations in September, rising 1.9 percent from August and 5.4 percent year-over-year. It rounds out a strong quarter that not only completed a V-shaped recovery in sales but also handily exceeded totals from Q3 2019. The at-home “nesting” trend was again in full force in September as consumers spent big on building materials, garden products, sporting goods and other hobbies. Consumers also purchased vehicles, clothing and dined out more through the month.

Retail sales and consumer spending trends will likely receive heightened attention through the final quarter of the year. Holiday spending is, as always, a major focal point in the fourth quarter. But we’ll want to see how, or if, spending is affected without an additional round of fiscal aid from lawmakers.

Small Business Optimism Historically High: The NFIB Optimism Index rose 3.8 points to 104 in September, with nine of the index’s 10 subcomponents improving.

Small business owners reported an uptick in foot traffic and improved sales, but some are still having a hard time operating at full capacity as they navigate state and local regulations during the pandemic. Nearly 1 in 4 business owners surveyed said they planned to create new jobs within 3 months. However, 36 percent say they are having trouble filling existing openings, particularly in construction. A third of construction company owners said “finding qualified labor” is a top business problem and is slowing new home construction (a sector of the economy that is showing incredible strength right now).

Still, the uncertainty index pushed higher to 92, which is up from 75 in April.

Bank Earnings Better Than Expected: The quarterly earnings season opened, as it always does, with the big banks. And, overall, results were better than expected. JPMorgan, Citi, Bank of America, and Wells Fargo beat estimates, mainly because the banks didn’t need to allocate as much to cover potential loan losses. Trading and investment banking performance continues to be a source of strength, while a decline in net interest income pressured margins and profitability.

“Both tangible book value per share and book value per share grew quarter over quarter and year over year, even without share repurchases the last couple of quarters,” says Matthew Stucky, an equity portfolio manager at Northwestern Mutual. “This confirms our earlier view that the COVID-19 impact to the banks would be contained to the income statement and wasn’t likely to be a balance sheet event.”

In other words, the banks are weathering fallout from the pandemic and are showing some strength even in a low-rate environment.

Unemployment Claims Edge Higher: The number of Americans applying for unemployment benefits last week rose to a two-month high of 898,000. Weekly claims have hovered between 800,000 and 900,000 for several weeks now. A rise in cases and the potential for new restrictions in some parts of the country remain primary obstacles for traction in the labor market.

Industrial Production Dips: U.S. industrial production dipped 0.6 percent in September, which is the first decline since a 12.7 percent drop in April when lockdowns were imposed around the country. While this is just one month of data, it does indicate some slowing momentum for manufacturers, which have been relatively strong following pandemic lows.

THE WEEK AHEAD

Earnings Continue: The big banks reported last week, but smaller, consumer finance companies like American Express, Capital One and Discover Financial will report, and their earnings could be insightful about the health of Americans’ finances and spending. We’ll also hear from Netflix, Tesla, Coca-Cola, Procter & Gamble and telecom giants AT&T and Verizon.

Other Key Data This Week: It’s been a bright spot for much of 2020, and this week we’ll see a new round of data from the housing market — builder confidence, housing starts and building permits. We’ll also thumb though the Federal Reserve’s Beige Book, which contains anecdotal observations about the economy from all 12 Fed districts. It can be an insightful read, given the pandemic is impacting regions of the country in different ways. We’ll also keep an eye on initial jobless claims, given the modest rise we saw last week.

Keeping an Eye on the FDA: On Thursday, the Center for Biologics Evaluation and Research (CBER) and Vaccines and Related Biological Products Advisory Committee (VRBPAC) will meet in open session to discuss COVID-19 vaccine development. Now, these aren’t exactly household names, but they are two branches of the FDA that focus on the safety and effectiveness of vaccines and regulations about their use. While there’s no specific application on the agenda, they will be talking about the development and approval process. The meeting may be worth keeping an eye on, because there could be key revelations about approval timelines and how a vaccine will, logistically speaking, get distributed to large swathes of the American public.

Election Coverage This Week: Keep an eye out this week for another round of election coverage. Matt Stucky and Jeff Nelson, Northwestern Mutual equity portfolio managers, will discuss their post-election outlook for various sectors of the economy in an upcoming piece. From antitrust actions in big tech to the potential for big reforms in health care, Matt and Jeff offer their insights for investors.

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