Hope all is well with you and your family. Last week marked the 11th time this year that the S&P 500 has closed more than 2% lower than where it started the week. The S&P 500 fell almost 6%, it was the worst weekly decline since March 20, and the sell-off was largely driven by news that daily coronavirus cases have hit new record highs, and by less certainty that we will see another round of fiscal stimulus this year. Notably, the technology sector, which has been a leader for much of this bear-market rally, was down 6.5%, making it one of the leaders in the decline this week. Some good news was the strong third-quarter GDP growth, a labor market that is continuing to recover, and consumer spending that is continuing to exceed expectations. I have broken down this week's commentary by hit singles from the Doors.
Riders On The Storm
The markets are experiencing a perfect storm of volatility. With days left before the U.S. election, a trifecta of worries around the political outcome, the path of the virus, and the lack of progress on another fiscal package weighed on stocks. Volatility jumped 40% from the prior weeks' level . The spike in volatility does not signal a 180-degree change in the long-term outlook for stocks, but rather reflects some nervousness around uncertainties that are likely to result in a slower, bumpier path ahead.
Love Me Two Times
Election uncertainty persists. Will the American people love the President two times? The stock market hates uncertainty, and the presidential election poses a unique type of uncertainty in that it has a repeatable calendar-based frequency. The current political environment feels unique considering the growing partisan polarization, the pandemic and the economic backdrop. To the market the uniqueness of the election cycle matters not. Uncertainty drives volatility, and we have the prospect of a delayed outcome and claims of victory on both sides. Remember no matter what side of the political fence you're on it’s far too soon to know how close this year’s race will be. Delayed results will cause swings in the market. Not knowing who wins before midnight on Election night doesn’t mean something is wrong or that anything nefarious is taking place. It may mean only that the race is close, or that election officials are taking more time than our impatient minds might like to count the boom in advance votes.
Break On Through
You might be tempted to try to run or try to hide but the right advice is to break on through to the other side of this election. Continue to hold your stocks through what will certainly be a bumpy couple of weeks ahead. Knee-jerk reactions are common but not necessarily smart for long term money. Since 1932 there have been 22 U.S. presidential elections. In 14 of those instances (64% of the time), stocks declined the day after the election, likely reflecting anxiety about the future because a large section of the population is unhappy with the outcome. Most of the post-election day returns have ranged between -1.5% to 0%, but there have been a few sizable declines, some of them taking place in recent history. Stocks initially dipped 5.3% after Obama's 2008 victory and 2.4% after his 2012 win. Stocks declined 4% in the early hours after Trump’s victory, as well. Historically, these post-election dips proved misleading and short-lived, with stocks quickly reversing course. Fundamental conditions set the tone for market outcomes - outside of the one-day post-election market reaction, which is inconsequential for long-term investors, stocks have risen one year after the presidential election in 16 out of the last 22 presidential elections (73% of the time). Over longer-time periods, fundamental factors such as economic growth, corporate profits and interest rate conditions are the more powerful and lasting determinant of performance. You don't need to go back too far into annals of history to find powerful examples. Since 1980 there have only been two instances where stocks produced negative returns one month, two months and six months following an election. They took place in 2000 (Republican president) and 2008 (Democrat president) with both declines being largely attributed to asset-price bubbles rather than politics. On the flip side, stocks recorded strong six-month and one-year returns following the 2012 (Democrat president) and 2016 (Republican president) elections, driven by improving economic data and rising earnings. This time around, while the range of outcomes is wide, the backdrop is positive, there is an improving labor market, record corporate profitability in the largest companies, and low interest rates.
Touching is happening again and places throughout the world and the country seem like they are not afraid. The virus is spreading the resurgence of COVID-19 cases is a headwind that threatens to slow, but not derail, the recovery. The path of the virus poses unprecedented uncertainty to the economic outlook. Medical solutions (therapeutics or a vaccine) are likely necessary for a full return to normalcy and economic recovery. However, we know a lot more now about the virus and I don’t feel the recent uptick in cases will lead to a repeat of the conditions witnessed in the early stage of the pandemic. Economic damage from any new restrictions is likely to be contained, last week brought the news of renewed restrictions and lockdowns in France and Germany in order to deal with the pressure of mounting infections. Nonessential businesses like restaurants, bars, gyms and theaters will close for one month, but unlike the March and April lockdowns, schools and factories will remain open. In the US there is less of an appetite for a shutdown although I won't be shocked if we see more targeted and localized closures if the current virus trends continue.
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