Video Update: The Post-Election Calculus
Here’s my video update for today. For greater details, read my article below.
Stocks rose last week, with the S&P 500 posting its best weekly gain since early July. The impetus for the stock market’s rise was the expectation for a new package of coronavirus relief spending. Stock futures Monday were higher in pre-market trading, as investors continued to hope that lawmakers would somehow break the logjam in stimulus negotiations.
I’d love to see new fiscal stimulus; so would Wall Street. The ailing economy needs it. But it’s doubtful we’ll get it before the election. After the election? That’s where the odds of stimulus dramatically improve, whether it’s Donald Trump or Joe Biden in the White House.
With only a few weeks to go before the November 3 vote and Republicans eager to push through a replacement on the Supreme Court, it’s unlikely that we’ll get a coronavirus relief package over the near term. Notably, Senate Leader Mitch McConnell (R-KY) last Friday threw cold water on the chances of stimulus getting passed before the November election.
Markets were volatile last week as hopes for stimulus waxed and waned. But markets are forward looking. Wall Street anticipates major legislative action, on several initiatives of benefit to investors, to occur after the election. Hence last week’s strong gains in equity markets (see table).
The small-cap Russell 2000 Index last week soared more than 6%, within 10% of its 2018 peak, as investors started to feel more confident about the recovery. Utility stocks outperformed. Indeed, the utility sector is a smart bet now for investors who seek income, safety and growth. (For our selective list of high-yielding utility equities, click here.)
The yield on the benchmark 10-year Treasury note surged during the week and surpassed its highest level in four months.
Because of the Federal Reserve’s aggressively dovish actions, bond-market functioning has returned to pre-pandemic levels. The influx of liquidity is shoring up the economy.
The expectations game…
The third-quarter corporate earnings season begins in earnest this week, with several big banks leading the way. According to research firm FactSet, the analyst consensus is for S&P 500 third-quarter earnings to drop in aggregate by 20.5% compared to the same quarter a year ago. If that decline comes to fruition, it would represent the second largest year-over-year contraction in earnings for the index since the second quarter of 2009, a year that marked the nadir of the Great Recession.
Second quarter 2020 earnings came in better-than-feared, which has led analysts this time around to ratchet up their expectations for Q3. The bar was set low for Q2; now it’s higher for Q3. This latest bout of earnings optimism could pave the way for disappointment, because the pandemic continues to pressure the economy. More than one in four S&P 500 companies are not providing earnings guidance for 2020 or 2021.
Exacerbating earnings uncertainty are electoral tensions. However, once the election is finally over, it’s likely that Republicans and Democrats will agree on legislation in a broad array of areas to combat economic damage from the coronavirus. New spending would be a long-term tailwind for stocks.
If Joe Biden wins, will we see higher taxes on corporations? Probably. However, these taxes would be accompanied by post-election stimulus initiatives that would be welcomed by the financial community, such as greater infrastructure spending and enhanced assistance to struggling cities and states.
Biden’s proposed “Build Back Better” plan, which he has vowed to pursue in the spring of 2021 if he wins, is an ambitious package of spending that totals $3 trillion. However, with the election out of the way, a second-term Trump administration probably would pursue substantial new spending as well.
Despite current risks, as a general rule of thumb you should currently keep about 30% of your portfolio invested in stocks (tailor the percentage according to your risk tolerance and stage of life). Cyclical stocks, in particular, would benefit from any stimulus deal.
Historically, market volatility increases in advance of a national election, but ebbs afterwards as government policy becomes better known. Wall Street can accept a “blue” or “red” victory; what it can’t accept is chaos.
Another long-term positive for stocks is monetary stimulus. The Federal Reserve won’t tighten the money spigot anytime soon. For investors, the occupants of the Marriner S. Eccles Federal Reserve Board Building exert greater economic influence than the occupants of the White House.
So yes, we’re on track for an economic resurgence in 2021. But between now and then, we face enormous peril.
The November election could erupt into street violence, with the winner unknown for weeks or even months. The Biden-Trump donnybrook could make the “hanging chads” of Bush-Gore 2000 look like child’s play.
At the same time, the coronavirus pandemic is not over and the winter flu season is soon upon us. COVID-19 still has a deadly grip on the nation (see infographic):
As of this writing on Monday, the U.S. counts about 7.8 million confirmed cases and about 215,000 deaths from the coronavirus. Anyone who tells you that the coronavirus is “disappearing” is contradicted by the facts. The U.S. is currently reporting more than 50,000 new cases of COVID-19 per day.
Until the virus is contained, the stock market and economy will never be fully out of the woods. Hopes that a vaccine will magically appear on the near-term horizon are little more than fantasy. It takes years to develop a safe vaccine; claims to the contrary amount to political posturing.
Ignore the rumors and keep an eye on the data, The holiday-shortened week ahead will be crowded with market-moving economic reports (see table):
To be sure, we’re already seeing tentative signs of economic recovery. Last week, Markit and the Institute for Supply Management released several purchasing managers’ indexes for September, which generally exceeded consensus expectations.
However, unemployment remains at extremely high levels and government assistance has run out for financially distressed households. Another 1.3 million people applied for unemployment insurance (UI) benefits last week. That includes 840,000 people who applied for regular state UI and 464,000 who applied for Pandemic Unemployment Assistance.
Millions of Americans face eviction from their homes and are having trouble putting food on their tables. The transition back to prosperity will happen, but it will be bumpy.
That’s why you need to read our new report: Reset 2020. This report lays out the right steps to prepare (and profit) now, before it’s too late, from this economic reset. To discover what you need to know, click here to access Reset 2020.