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All the Headwinds Causing Stocks to Sell Off

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Stocks sold off Thursday as third quarter earnings season begins, but the forward-looking economic picture is dimming.

The S&P 500 fell 1%, lead by tech stocks, with the Nasdaq down 1.5%. The 10-Year Treasury yield fell to 0.71%. Yields fall when prices rise.

For the past week or so, the yield is down from 0.7%. Value stocks on the S&P 500, which are more sensitive to changes in the economy than are growth stocks, are down about 2% this week.

Jobless claims for the past week came in at 898,000, a far higher number than last week’s 845,000 and higher than economists estimates of roughly 830,000. Recently, the number of weekly jobless claims has been declining at a slowing pace week-over-week, causing investors concern over the pace of the economic recovery, a concern often thwarted by better-than-expected net jobs added. But the data out

Thursday, which featured a considerable increase in claims, is worrisome, especially as coronavirus vaccines are delayed, as is fiscal stimulus. Treasury Secretary Steve Mnuchin said fiscal stimulus isn’t likely until after the election. It is possible Thursday’s claims reflect an already ailing economic recovery resulting from the lack of stimulus.

The economy either needs to be reopened in order for employment and consumer spend to continue its V-shaped recovery, or small businesses and households need free cash from the government. Investors are now concerned the speed of the economic recovery is threatened.

"The jobless claims report is a stark reminder that we are far from out of the woods—albeit heading toward recovery,” wrote Mike Loewengart, head of investment strategy at E*Trade, in emailed remarks to reporters. "In the meantime stimulus is critical and we’re still on shaky ground there. Without that boost from the government, jobs numbers will likely continue to flag.”

All sectors sold off, with debt-laden cyclicals faring the worst. Delta Airlines  (DAL) - Get Delta Air Lines Inc. Report fell 2%. Oil producer Occidental  (OXY) - Get Occidental Petroleum Corporation Report fell 2.6%. Larger capitalization value stocks were down in a range of a bit less than 1% to a touch over.

Investors are confident a potential Biden presidency would bring heavy fiscal spending during the pandemic, which pressures the economy, but with each day of no fiscal stimulus in 2020, small businesses move closer to closing their doors, stunting the recovery.

Meanwhile, earnings on the S&P 500 for the third quarter are expected to fall roughly 20% year-over-year, an improvement over Q2’s roughly 30% drop. If investors see sequential improvements in earnings, they will feel encouraged, but they will also need evidence that the momentum can continue. Thursday’s economic-related developments do not help.

“Earnings results are coming in better than last quarter….the market more or less has been brushing off pretty solid results,” said Loewengart.

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