HIGHLIGHTS

• US stocks ball by 5.6% and international equities were down 5%.
• Good economic reports.
• Q3 GDP expands by a record amount.
• Biden leads going into election day.
• Lockdowns beginning in parts of Europe as the virus explodes there and in the US.

MARKET RECAP

US stocks fell by the most since March, dropping 5.6%. It was the worst loss ever in the week preceding a Presidential election. While stocks fell, the ten-year yield reached its highest level since June, the exact opposite of how treasuries normally act in a falling equity market. High tech valuations, a fast-expanding virus in Europe and the US, and then throw-in election worries and you have what it takes to tilt the market way off balance.

US equities hit their high on 9/2 and then sold off by 9% through 9/24. A subsequent rally ended on 10/12 when stocks could not break through the September high. The market is now down 7.5% from the high.

The economic news for the week was good. GDP was up by a record amount in the third quarter. Jobless claims fell to a 7-month low, coming in at 751,000. Personal income rose in September by 0.9% and personal spending was up by 1.4%. Corporate earnings are down 12.5% from last year but 9% higher than was forecast, according to Lindsey Bell, the chief investment strategist at Ally Invest.

Real GDP shot up by a record 33.1% in Q3, which followed a 31.4% drop in Q2. Net, net, the US is down about 3.5% from the pre-crisis peak. To close the remaining gap, the service economy is going to need to get back to normal, and that will be almost impossible if the virus keeps impacting economic activity.

With the election just a few days away Biden leads by more than 8 percentage points based on recent surveys, but Trump is counting on inaccurate polling to pull the surprise victory. The pollsters, who completely miscalled the 2016 election, say don’t count on it, with the likely outcome being between a somewhat close contest with a Biden edge that can be disputed and spillover to the courts, to a Biden blowout win. The bigger question is can the Democrats take the Senate. Assuming a Republican victory in Alabama, the Dems will need to win four seats currently held by Republicans to gain control. With Colorado, Maine, and Arizona leaning to the Democrats, “North Carolina or Iowa could be the tipping-point states,” according to Jessica Taylor, editor of the Cook Political Report.

Germany and France implemented a new set of lockdowns to try to get the virus under control. France will lockdown for at least one month. People will have to remain at home, nonessential businesses will close. The German lockdown is less restrictive but will close restaurants, bars, gyms, and theaters. Here in the US, the surge of the virus is now at record levels.

A second wave in pandemics is common. The Spanish Flu of 1918 was marked by an initial breakout in the spring of 1918 followed by a second wave from September to November of 1918. The Asian Flu of 1957 had its initial wave in the US in October of 1957 and then the second wave in January and February of 1958. The Hong Kong Flu of 1968 started in July of 1968 and lasted into the winter of 1969 and then a second wave appeared late in the fall of 1969 and ending in the winter of 1970.

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