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Weekly Market Update (October 19, 2020 - October 23, 2020 )

By: Craig Fehr, CFA October 23, 2020

Following three consecutive weekly advances, stocks declined modestly last week. The news flow was dominated by headlines around the negotiations for another round of fiscal relief from Washington before the election, which is fast approaching. The 10-year Treasury yield rose to the highest level in four months amid expectations that a potential Biden win would lead to a larger relief package to support the economy. Aside from the speculation about potential election outcomes and policies, economic data for the week was encouraging to the long-term outlook, showing an improvement in jobless claims and continued strength in the housing market. 

Market Anniversaries: Cause for Celebration?

Markets behaved in a somewhat orderly fashion last week, oscillating in a fairly narrow band that left U.S. equities slightly in the red for the week.  We’d stop short of labeling last week the 'calm before the storm" because we think there are credible reasons for stocks to have a toehold. That said, we think investors would be well served to brace for a bumpier ride as we work our way to, and through, the election.

Current conditions are prompting a perception among some investors that the election represents a binary outcome for the market. November 3 may be viewed as a seminal moment in our country’s political landscape, but when it comes to investing, it’s the much broader periods of time – not singular moments – that matter most.

In addition to political headlines and reasonably encouraging economic readings, last week brought a few market anniversaries, including the 33rd anniversary of the “Black Monday” crash. Here’s a look back at a range of notable days or periods for the market and the accompanying investment conditions that can provide some perspective on what may lay ahead for investors:

One Week: All Eyes on Congress    

  • The nation’s eyes are focused on the race for the Oval Office with one week to go until election day, but the market took its cues from the progress (or lack thereof) on negotiations for another round of fiscal relief from Washington. Stocks rose on glints of partisan compromise and softened on any news of renewed stalemates.
  • The fact that the market moves were more influenced by the prospects of fiscal stimulus than the impending election signals three things:
    1. The importance of additional fiscal relief to the health of the economic recovery.
    2. This election matters, but the growth of the economy and corporate earnings will be a more powerful and lasting driver of market performance after the election frenzy subsides.
    3. The market has become somewhat more comfortable with the fiscal implications of potential election outcomes.
  • 10-year rates rose last week, signaling that the market may be applying a more positive outlook to economic growth next year regardless of the election outcome. It appears the market is reflecting a view that a Biden win, while likely to bring higher tax rates for businesses and high-income earners, could also come with a larger fiscal-aid package and/or infrastructure bill, which would offer a boost to near-term GDP.
  • We maintain our view that the economic expansion will be sustained in the coming years, irrespective of who wins the White House. At the same time, we’re not convinced that the market will maintain its tranquility in the coming weeks.
  • We expect markets to swing widely around the election, particularly if November 3 produces a contested or inconclusive result.  Any election-driven volatility should not, in our view, be a reason to abandon your longer-term strategy.  Election anxiety may be sizable or extended, but it will pass, and markets will take their cues from the larger economic recovery.  Reports last week, including notable improvement in weekly initial jobless claims, indicate that the economy is still enduring pandemic headwinds, but remains on a path of broad improvement. 

Seven Months: The Bear Market Turns Into a Bull

  • March 23 was the pandemic bear-market low, with the fastest drop in history from record highs to finding a bottom. The S&P 500 fell 35% in just over a month as the health care crisis and budding economic shutdown produced the first bear market in more than a decade1.
  • The drop was severe and jarring, but discipline and perspective were rewarded as March 23 represented the inflection point in the stock market “V." Equities have returned to new highs, including a 60% rally from late March to early September, one of the most vigorous starts to a market recovery in history1.
  • While the unique nature of the recession (a self-imposed shutdown) played a key role in the sharp moves, the policy responses from the Federal Reserve and lawmakers (the $2.2 trillion CARES act) formed the foundation that enabled the rebound to take shape. We expect these forces to remain helpful as we advance. We think the Fed will keep rates low, support credit markets, and provide unprecedented liquidity for several years to come. And while not without partisan battles, we think another round of fiscal aid after the election will transpire, providing needed relief to businesses and households that can support spending amid the economic gap until the labor market heals further and an eventual vaccine can usher in more normal economic activity.

Four Years: Politics Pivots to Policy

  • The four-year anniversary of the last U.S. presidential election is approaching. November 8, 2016, shifted the market’s focus from a unique and heated campaign toward the potential policy landscape under a newly elected President Trump.
  • Markets swung widely in the week leading up to the election, became even more volatile in the overnight markets as the election results came in, and found a boost the day following election, rising more than 1% on November 9, 20161.
  • Our view – supported by historical experience – is that markets are not partisan over the long run, but hate uncertainty in the short run.  Elections bring uncertainty, but as that uncertainty fades, stocks reconnect to fundamentals which are influenced – but not solely determined – by Washington policies.
  • The S&P 500 saw a healthy rally following the election, rising more than 20% in 2017 with historically low volatility (the market never experienced even a 3% pullback during that year) as the prospects of coming tax reform spurred equity-market optimism1.
  • Concerns that a Biden administration will reverse some of that tax policy are not misplaced, in our view, but it should not be overlooked that 1) markets have thrived in much higher corporate-tax regimes than he is proposing, and 2) the markets are finding some comfort in the potential for a larger Democratic fiscal package to offset the near-term economic and corporate-profit impact of a rise to a 28% corporate tax rate. 
  • While it can be difficult in the throes of the election, it’s important to avoid evaluating investment conditions through politically colored lenses. The stock market has risen 62% since the last election, which included the pandemic bear market1. The market rose 58% from 2009 through 2012, the first four years of the Obama administration, which also included a portion of the global financial crisis and Great Recession1. This is not an endorsement or an indictment of any party, but instead a reminder that markets have done well under a myriad of different political conditions.
  • Since WWII, the average stock-market return in the four years between presidential elections is 37%1. There were only three four-year terms in which the market was negative for the period. 

33 years: Black Monday Sets the Bar for Volatility

  • Last week brought the 33rd anniversary of what is known as “Black Monday.” On October 19, 1987, the Dow fell 23% (508 points at the time), the largest single-day decline for the stock market. For perspective, the second-largest decline on record happened earlier this year when the Dow fell 13% (2,997 points) on March 161
  • A good reminder of why it’s important not to panic or abandon your strategy when daily declines reach extremes, the Dow had its eighth-best day on record two days after Black Monday (rising 10% on 10/21) and its fourth-best day in history earlier this year, rising more than 11% on March 241
  • Conditions in 1987 were sufficiently different than they are today, with the market sell-off driven more by prevailing market factors and structure at the time. There was no associated recession (one of the few bear markets in history that was not accompanied by a recession), and stocks returned to pre-Black Monday levels two years later. 
  • While economic conditions, policy settings and market structure are different today, the anniversary of Black Monday highlights that
    • Market volatility is normal. Daily declines of 20% are certainly not normal, nor do we think swings, like we saw in March of this year, will be frequent or regular1. But extreme short-term market moves don’t necessarily signal a more protracted period of market declines ahead.  In fact, historically, the most significant daily declines tend to occur near the latter stages of sell-offs and are often followed by similarly large up days; and 
    • Bear markets are followed by bull markets.  Black Monday was followed by the longest bull market in history, spanning from 1987 to 20001.  The ‘08/’09 financial crisis gave way to the second-longest bull market that ran from 2009 to 20201. We don’t think another decade-long bull market is an inevitability from here, but this year’s market rebound demonstrates the value of a disciplined strategy and a long-term approach to investing. 

Craig Fehr, CFA
Investment Strategist

Sources: 1. Morningstar Direct

Index Close Week YTD
Dow Jones Industrial Average 28,336 -0.9% -0.7%
S&P 500 Index 3,465 -0.5% 7.3%
NASDAQ 11,548

-1.1%

28.7%

MSCI EAFE 1,884.26 0.1% -7.5%
10-yr Treasury Yield 0.84% 0.1% -1.1%
Oil ($/bbl) $39.71 -3.4% -35.0%

Bonds

$117.47 -0.4% 6.2%

Source: Morningstar, 10/23/2020. *4-day performance ending on Thursday. Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results.

The Week Ahead

The third-quarter earnings season is in full swing, with almost 40% of the S&P 500 companies reporting earnings throughout the week. Important economic data being released include consumer confidence on Tuesday, third-quarter GDP growth on Wednesday, and personal income and spending on Friday.

Review last week's weekly market update.

Important Information

The Weekly Market Update is published every Friday, after market close.

Market indexes are unmanaged and cannot be invested into directly and are not meant to depict an actual investment.

Past performance does not guarantee future results.

Diversification does not guarantee a profit or protect against loss.

Systematic investing does not guarantee a profit or protect against loss. Investors should consider their willingness to keep investing when share prices are declining.

Dividends may be increased, decreased or eliminated at any time without notice.

Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates and investors can lose some or all of their principal.

Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.

The content of this report is for informational purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation. While the information is believed to be accurate, it is not guaranteed and is subject to change without notice.

The Dow Jones Indexes are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use.

All content of the Dow Jones Indexes © 2017 is proprietary to Dow Jones & Company, Inc.

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