Markets Take a Pause
Equities reversed course for the month but continued to surge for the quarter
Volatility dominated markets during September, as the S&P 500 posted its first loss since March amid a resurgence in COVID-19 cases, political infighting, and worries surrounding the upcoming U.S. election.
Despite a late-month surge, stock markets ended September in negative territory, with only the utilities sector posting positive returns. After leading the market for the past several months, the technology sector hit a bump and posted a loss. For the quarter, all sectors rose with the exception of the energy sector, continuing the pattern started earlier this year. Year-to-date, the S&P is up 4.1%.
The energy sector is still reeling from the precipitous drop in demand for oil and refined products from earlier this year. As supplies piled up, many companies were forced to cut production, lay off staff or merge with rivals to cope with the crisis.
According to Keefe Borden, Energy Analyst for Quantum Economics:
“The industry still hasn’t got their breath, and there are signs the changes are permanent.”
Some of those permanent changes include consolidations. At the end of the month, Devon Energy (DVN) and WPX Energy (WPX) announced an all-stock merger. If approved by shareholders, the merger has the potential to reduce Devon’s exposure to federal lands, while reducing leverage for WPX.
Combining the two entities will reduce operating costs and lower the break-even price to $33 per barrel for West Texas Intermediate Crude, creating one of the largest independent U.S. shale producers.
The effects of the pandemic continued to accelerate the shift to online retail, challenging brick and mortar stores. Through September, 27 retailers filed bankruptcy, surpassing 2019, which saw 17 major retailers declare bankruptcy. In comparison, in 2010, shortly after the Great Recession ended, 48 retailers filed for bankruptcy. While many are hoping for a successful holiday season, renewed shutdowns indicate a grim prognosis. Global market-research firm Coresight Research indicated that retailers are likely to decide to close as many as 25,000 U.S. stores in 2020.
The challenges of the continued work-from-home, learn-from-home environment include cyber threats. During the month, hackers stole and published documents containing personal information from a large public school district in Las Vegas. The hacker demanded a ransom payment to unlock computer servers, which officials declined. This event proves that both companies and school districts need to be increasingly vigilant.
Firms that provide cybersecurity should continue to thrive as the remote environment continues into the end of 2020. Five9 (FIV) is a provider of cloud-based center software and develops machine learning algorithms. During their Q2 earnings call, management noted how the migration of cloud has continued to fuel growth for the company, as well as the shift to digital transformation.
Investor appetite for initial public offerings (IPOs) has been strong in 2020, particularly in health care and technology. Through the end of September, 266 companies listed, far outpacing deals through the same time last year. In technology, software company Ivanti, said it would acquire security platform provider MobileIron (MOBL) in an all-cash deal. Ivanti also purchased the assets of PulseSecure. Zscaler (ZS), a world leader in cloud security, announced a strategic partnership with VMWare to expand its product collaboration and accelerate digital transformation late in the month.
The month ended with much fanfare over two direct listings: data mining specialist Palantir, and team workplace management software maker Asana. Both firms went public on the last day of the month using a direct listing as opposed to an IPO, and their share prices quickly jumped. Closing prices valued Asana’s market valuation at approximately $4.4 billion, while Palantir is valued at about $24 billion.
As we head into the fourth quarter, we also close in on the U.S. presidential election. Historically, October is a weak month for markets, and this trend is more pronounced during election years.
This year, the uncertainty is escalated, given the possibility that election results may not be available immediately. And while the technology sector has driven market performance, news that U.S. democratic lawmakers are calling for a breakup of big tech firms could prove to be a headwind. Given the added unpredictability of the coronavirus, volatility is likely to remain through the end of the year.
Markets are in constant flux, and the only thing certain is continued uncertainty. To learn more, visit quantumeconomics.io. This information is for educational purposes only and should not be construed as trading advice. Past performance is not an indication of future results.
