The market sold off this week as investors digested a combination of both positive and negative news including record breaking 3rd quarter economic growth, increasing coronavirus cases, and an unknown and potentially contentious election. Here is a summary of the key issues affecting the market.
3rd Quarter GDP sets a record
Thursday’s release of 3rd quarter economic growth showed a record breaking 33% quarter over quarter increase. Of course, the increase follows record a record-breaking drop in the second quarter, but the results do show a V shaped recovery so far, characterized by a steep drop followed by a steep recovery. The significant government stimulus, both the CARES Act from Congress, and the ultra-easy low interest rate policies of the Federal Reserve, appear to be working as the country recovers from the second quarter government shutdowns.
Increasing Coronavirus Cases
In contrast to the strong economic progress, the progress on the virus front has been discouraging as daily new cases in the U.S. have climbed to a new record. The key investing question is, “how will the increase in cases translate into economic growth or contraction?” The answer will hinge on the government response. Europe too has seen new spikes and governments are implementing new shutdown measures there, fueling a stock market selloff. So far, there is little appetite for new shutdowns in the U.S., but if the virus continues to worsen that attitude could change. Over the past few months, the market has become decoupled from the virus, as seen by the stock market rising despite a rise in cases. That could change if we return to a ‘government mandated shutdown’ strategy.
A contentious election
Finally, much of the volatility this week could be ‘election jitters’ as investors become defensive in the face of election uncertainty. Despite the focus on the presidency, there are good reasons to believe that the market could rise over the next twelve months under either candidate. Both have pledged new economic stimulus and appear to be ready to spend whatever it takes to get the U.S. economy back on track. Also, a gridlock scenario where the Presidency, Senate, or House of Representatives are held by a mixture of Republican or Democratic majorities, could be a positive from a market perspective since it hampers either party’s ability to enact significant change. The biggest risk remains election uncertainty, where election results are disputed resulting in legal challenges and civil unrest. If there is no certain outcome, the markets could react negatively until the results are decided.
It is always difficult, and a little dangerous, to set your investment strategy around political outcomes. Not only are political events difficult to predict, but they are also rarely the most important factor in the economy. As we face election uncertainty, it is time to remember your long-term investment strategy, and make sure that you are comfortable with the risk profile, and defensive positioning in your portfolio. That way, you can be confident in your portfolio no matter what comes.