Escalating Chaos Again Proves Incapable of Derailing the S&P 500
The S&P 500’s verdict on such a nerve-wracking week? Up 1.5%.
(Bloomberg) -- First it was a shouting match of a presidential debate that raised doubts about the sanctity of the electoral process, then news Donald Trump had fallen ill with Covid-19. The S&P 500’s verdict on such a nerve-wracking week? Up 1.5%.
Even with Friday’s decline on the president’s diagnosis, stocks managed enough buoyancy over the first four days to come out comfortably ahead, defying a panoply of threats. If anything is a microcosm for the 2020 stock market, the last few days are it -- dip buyers clawing their way through considerable political and societal gloom and finding things to embrace.
It’s nothing new. All year, no matter how bad things have gotten, investors have located a bright side. One of the worst economic recessions in decades and millions of unemployed Americans are already just a blip on the chart of a rally that lifted the S&P 500 by 60% over five months. In their quest to accentuate the positive this time, traders focused on Congress.
“It will increase the odds of stimulus, it pushes the subject to the table,” said Katy Kaminski, chief research strategist and a portfolio manager for AlphaSimplex Group. “It’s another thing that says, ‘hey, we have to deal with this.’ It puts that to the front and that’s why it’s more likely they’ll make something happen. The market can continue to do well.”
Stocks advanced broadly over the five days, resuming a rally that was interrupted in September by a palette of concerns ranging from bubble valuations in the Nasdaq to rising cases of virus infections. The Dow Jones Industrial Average rose 1.9%, snapping a string of retreats, while the Nasdaq 100 added 0.9%. Not content just to tick up, small caps had their best week in two months.
There’s precedent for some of this. Historically, presidential health shocks have had a fleeting impact on asset prices, according to Sam Stovall, chief investment strategist at CFRA Research. Everything from hospitalizations to deaths have mostly resulted in declines of 3% or less that lasted just a few days, his study shows.
Thanks to another source of stimulus, the Federal Reserve, it’s been virtually impossible since March to convince traders that any threat to markets will prove permanent. Almost half of the respondents in a survey of investors and corporate clients expect the next 10% move in stocks to be higher, the most since the pandemic started, Evercore ISI said.
“People believe, and I do too, that the Fed and other central banks are definitely eager and willing to do as much as necessary and to support liquidity and to support the markets in general. That hasn’t changed,” said Nathan Thooft, Manulife Investment Management’s head of global asset allocation in Boston. “And we’re still seeing an economy that’s improving globally. There’s question marks around it, how quick it is and how powerful it is, but it is still moving in a positive direction.”
Still, there’s no denying the presidential election has put investors on high alert. Partly driven the prospects of a contested election, option traders have stepped up hedges against market turmoil way past Election Day into December.
To Marko Kolanovic, a JPMorgan Chase & Co. strategist, Trump’s illness “slightly” increases Democratic contender Joe Biden’s chance of winning, which could marginally reduce post-election risks and market uncertainty.
An RBC Capital Markets survey said more governmental aid is needed for the economy to fully recover. Almost half of the respondents believed that additional stimulus will come at some point in the fourth quarter and more than a third anticipated it during the first quarter of next year, according to the poll, conducted Sept. 21 to 29.
U.S. House Speaker Nancy Pelosi said negotiations with the White House on a new stimulus will press ahead and President Trump’s diagnosis might change the tenor of the talks by emphasizing the seriousness of the pandemic.
“With the president testing positive, our sense is that the odds of a ‘Phase 4’ stimulus deal have risen,” Chris Senyek, chief investment strategist at Wolfe Research, wrote in a note. “With a limited ability to campaign and potentially attend future debates, he now needs a deal more than ever, given that many of his core constituents have been very hard hit by the pandemic and have seen federal unemployment benefits fade in recent weeks.”
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