The market has been under pressure recently with popular reasons ranging from election jitters to new lockdown restrictions. Before considering how much the market actually cares about any of this, let’s understand what the market has been doing. The S&P 500 made a new all time high on September 2nd, at 3,588. Over the next three weeks, it fell 10.50% before bottoming on September 24 at 3,209. Then it went up, then it went back down, and now it’s basically where it was one month ago. Or, as Urban Carmel of The Fat Pitch aptly puts it, back in the “hot mess” from September. So what’s moving the market and what’s not?
Lockdowns are back in the news
A number of US states and international countries are implementing new lockdown restrictions as Coronavirus cases rise. While these restrictions are economically negative on the surface, they’re unlikely to have the dire impact they had in the Spring. One simple reason why: people are exhausted. There is no longer an appetite for lockdowns the way there was in March or April. Therefore, fewer businesses are likely to follow the restrictions, and more people are choosing to make their own decisions. In some municipalities, local sheriff’s offices aren’t even enforcing lockdown measures.
Unsurprisingly, businesses are even banding together to fight off lockdown measures, which will make it harder for state governments to regulate purported bad actors. In the suburbs of Chicago, for example, where new restrictions on indoor dining took effect last Friday, 70 business owners agreed to continue serving patrons indoors anyway. In addition, all we’re seeing right now are county-by-county lockdowns within states. Back in March-April we essentially had a national and global lockdown. I would say the market certainly doesn’t expect any nationwide lockdowns again, even if they would save lives.
So yes, perhaps these new lockdowns are partly responsible for the recent drop in the S&P 500, but that’s basically just a blip on the radar as far as 2020’s concerned. Therefore, the biggest risk to the market as far as lockdowns go isn’t if there are more of them on the way (there are), it’s if there is going to be stricter enforcement of them. Many European governments, for instance, are taking a much more aggressive approach, using law enforcement to implement harsher restrictions. Europe is down 3.60% this week versus a 2.20% decline for the S&P 500.
No stimulus is biggest market headwind
I think the inability to get a stimulus deal ahead of the election is probably the main reason the market’s come back down a little bit. After Trump got Covid, I wrote that I thought it was actually a positive because it increased the chances for a stimulus deal. I think the market proved that point in two ways:
- On October 6th, Trump tweeted that he was calling off negotiations with Pelosi over new stimulus until after the election. The S&P 500 fell 1.50%.
- Later that evening, he did a 180 and said he actually did want to agree to a stimulus deal before the election. The S&P 500 then went up more than 5% in three days.
It’s never easy to tell what is moving the market. However, in these instances, we had very binary market reactions (down big, then up big) to very specific news (stimulus tweets directly from the POTUS). So in this particular case, I think it is clear that the market did expect and start to price in some type of stimulus deal happening before the election.
Perhaps then it’s no coincidence that the market’s most recent decline started precisely on October 13th. That was the day Mitch McConnell and Nancy Pelosi basically guaranteed there would be no stimulus coming before the election because congress and the senate were too far apart on any type of deal.
What about the election?
Ah, the election. Is anyone else just ready for this to be behind us? I’m so sick of talking about it and even more tired of writing about it. But people keep asking so I keep talking, and writing… I’ll keep this short: I think there’s only one outcome that would surprise the market and that’s a Trump landslide victory. All other outcomes, including which way the senate and congress go (or don’t go), I think are already priced into the market.
The only interesting thing about the election and the market to me is how it impacts the odds of more stimulus. Because, again, the market does expect stimulus. And if it doesn’t get it, or see a clear path to getting it soon after the election, then we’ll likely see more market downside. So the main thing to watch after the election is this: how quickly and seriously do we get a new stimulus bill signed? That answer is likely to dictate the market’s direction as we move past November 3rd.
Still down 5%
As of this writing, the S&P 500 remains down more than 5% from its all time high. This is worth noting because small drops in the S&P 500 precede larger ones; every single 20% drop in market history has started from a baseline decline of at least 5%. This should not be construed as a warning that the market is about to drop 20%. That’s not what I think is going to happen. But, it does mean I am mindful of the 3,400 level as that coincides with the 5% decline threshold. The S&P 500 is not going back to its all time high without getting stability back above 3,400 first. And a failure to do so will leave the index vulnerable to another foray towards its 2019 closing price of 3,230, like we saw in September.
In summary, the S&P 500 has spent the last five weeks trading in a sloppy range, and now sits in the middle of that range. The rise in coronavirus cases and new lockdown orders are getting the majority of media headlines this week. However, I believe the biggest problem for the market is uncertainty about a near-term stimulus bill. The election is a known event unlikely to cause any shocks to the market, regardless of who wins. But, what isn’t 100% clear about the election is how the results impact the speed and size of any stimulus bill, and that definitely matters. It’s that transparency into a stimulus bill that will likely determine if the S&P 500 can regain 3,400 and advance, or turns the current 5% decline into a 10% decline.
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