Why did the market reach an all-time high in August?
Remember that the global fiscal and monetary response to the COVID-19 pandemic has been extraordinary. In the US, it has helped keep consumers “whole” – with many earning more income from aid spending than they were in the pre-pandemic environment. This has helped keep US consumer spending buoyant. Additionally, the sectors that have been most negatively affected by the pandemic – hospitality, entertainment, food service, retail – represent just 7% of the total operating income of the S&P 500®. Headlines about bankruptcies can make one believe that the damage is deeper and more widespread. While the economic damage has by no means been healed, economic activity has improved and the crisis has accelerated trends that actually benefit a significant portion of the market. The old adage “Tthe market is not the economy” rings true.
Should I be concerned about a tech bubble?
In our view, no. As we have written previously, the tech sector is tailor-made for lockdown conditions – think remote work, online shopping, and streaming entertainment. Large tech companies have been key beneficiaries of the “stay-at-home economy.” In our view, the current weight of tech stocks is amply justified by their earnings and business fundamentals.
What are the potential market effects of the November 3rd US elections?
Historically, US presidential elections cause an uptick of market volatility. We believe this November will be no different, although volatility risk is largely already priced -in as of late August. Obviously, volatility risk would be elevated in the event of a contested presidential election or any contested down- ballot contest of major significance – for example, a result that determines which party holds the majority in the Senate. While increased volatility may feel uneasy, we would expect knee-jerk reactions to be short- lived.
How might the results of the US presidential election influence markets?
As always, political dramatics and partisan rancor will intensify as the election approaches. Nevertheless, investors should remain mindful that many policy proposals are products of the pre-COVID-19 world. We believe that the economic and public health challenges pertaining to the COVID-19 pandemic will remain the foremost priority of federal, state, and local governments through early 2021 regardless of the election outcome. Economically disruptive agenda items are likely to be watered down or tabled altogether to prevent derailing the nascent recovery.
Would President Biden be bad for markets?
How important is further federal aid spending to the health of the economic recovery?
Crucial – particularly for state and local governments. As of late August, there are signs that Congress may agree to temporary measures designed to shore up some additional fiscal aid in advance of the elections while taking up a more comprehensive bill at a later date. Either way, we believe that continued fiscal support is a key component to the health of the economic recovery into 2021.