After a 5.7% rise in the U.S. stock market during the first half of October, markets turned around and headed lower, closing the month at a loss of -1.9%. This “mountain” pattern looks similar to what happened in August-September, when speculative bets concentrated in technology stocks drove markets to an apex, only for stocks to then reverse and give back their short-term gains.
What might be causing the “mountain” pattern this time? Two credible explanations stand out. To start the month, investors were optimistic that another large fiscal stimulus package would be passed. When negotiations seemed headed toward a successful outcome, markets went higher. When negotiations stopped, markets sold off. As of this writing, no deal has been reached, and any attempt at a resolution seems to have been pushed off until the election results are known. Regardless of election results, additional government stimulus is likely to come in the future.
The second credible explanation for the market’s turnaround this month is also the central theme of this entire year: the COVID-19 crisis. The United States is experiencing record numbers of confirmed cases, as is much of Europe. France, Germany and Spain were forced to implement renewed lockdown measures to try and contain the resurgent virus before their medical systems could be overwhelmed. The prospective negative effects of new lockdown measures caused European stocks to slide even more than their U.S. counterparts. Asian stock markets situated in countries which have done a good job controlling the pandemic showed a different result, delivering returns that outpaced the U.S. market and the European market.
Against this equity market volatility, interest rates have been slowly trending up without much notice. The yield on the bellwether ten-year U.S. Treasury hit an all-time low of 0.5% on August 4, and since then has crept higher to 0.87%. Shorter-term bonds were largely flat, while long-term treasuries declined almost 4%.
The Market and the Election Certification Process
When you receive this letter, the 2020 election day will have arrived. The volume of mail-in ballots, however, may delay the results of any number of political races, including the presidency. Even during a normal election, immediately available results are considered unofficial and the state certification process can take weeks. While markets dislike uncertainty, the behavior of the stock market during the 2000 Bush/Gore election is a helpful reminder of the market’s resilience. As the Florida-related results turmoil dragged on for over a month past Election Day, the U.S. market ended the ordeal with a decline of less than 5% – a level of volatility well within the normal range, even in a non-election year.
Regardless of the election outcome, or how the markets react, your team at Bell will be here for you. Should you need anything, don’t hesitate to contact us. We’re here to help.