S&P 500 Weekly Forecast: Investor jitters into Election Day and what it means for stocks

  • Investors will be anxious about the prospects of a contested US election outcome.
  • Stimulus impasse drags on and weighs on sentiment. 
  • COVID spread will be the Fed’s biggest concern in anticipation of fiscal stimulus.  

It was the biggest weekly sell-off since March as investors sold richly priced tech heavyweights and swerved the risk of the rise in coronavirus cases and the US election day. 

Investor jitters are playing out for the final trading day of the month and consequently, the CBOE volatility index VIX closed just below a 20-week high on Friday while the main indexes pared steeper losses toward the closing bell.

Apple Inc AAPL sank  5.6% after it posted the steepest drop in quarterly iPhone sales in two years due to the late launch of new 5G phones. Amazon.com Inc AMZN shed 5.45% after it forecast a rise in costs related to COVID-19, while Facebook Inc FB lost 6.3%, warning of a tougher 2021.

The Dow Jones Industrial Average lost 157.51 points, or 0.59%, to 26,501.6, the S&P 500 SPX dropped 40.15 points, or 1.21%, to 3,269.96 and the Nasdaq Composite shed 274.00 points, or 2.45%, to 10,911.59.

For the week, the Dow fell 6.5%, the S&P 500 5.6% and the Nasdaq 5.5%. For the month, the Dow dropped 4.6%, the Nasdaq 2.3% and the S&P 500 2.8% to meet critical supply level on the charts, (see daily chart below).

What’s in the mix?

Covid is a unique distraction for 2020 US election day. The pandemic has pushed US hospitals to the brink of capacity as coronavirus cases surpassed 9 million. 

Concerns about the economic recovery, investors are weighing the consequences for US markets and the prospect of wider COVID-19 restrictions, not only on home soil but in Europe also. 

For the US, traders are going to be uniquely distracted from Tuesday’s US election, confronting the prospect of a return to business shutdowns in some US states as COVID-19 cases rise to daily records.

A stimulus deal remains elusive which puts even more emphasis on the Federal Reserve at its Wednesday and Thursday meeting, and the US Nonfarm Payrolls report for October from the US Labor Department on Friday.

Indeed, volatility has been earmarked for the forthcoming week.

Anything outside of a so-called blue wave in Washington in a democrat landslide victory of both the White House and Congress could be unsettling for financial markets.

Investors will be anxious about the prospects of a contested outcome and the implications for the US population while the stimulus impasse drags on and on. 

Despite the widespread reports of layoffs and churn in the labour market, Republicans and Democrats in Washington have been unable to agree on a new coronavirus relief package, even as the state payments to the unemployed are set to expire by the end of the year.

Traders will be on the watch for ‘the call’

Election night can be just the start of what can be a very lengthy process to officially pick the president, which is a particular risk in 2020.

When asked by the press whether he would commit to ensuring that there is a peaceful transferal of power after the election result, the incumbent US President Donald Trump has said, ”Well, we will have to see what happens. You know that I have been complaining very strongly about the ballots.”

President Trump is expected to have already been laying the groundwork for a legal challenge to any election outcome that does not declare him the winner. His contestant, Vice President Biden, has similarly noted that he will likely wait until all mail-in ballots are counted before conceding defeat.

So, not only will the result of the popular vote by market impactful, but traders will be on the watch for news of ‘the call’ from either side, but especially from Donald Trump if he loses the vote.

‘The call’ is when the losing presidential candidate calls the winner to concede the election because, without it, investors will know that they will likely have to face several weeks of political uncertainty while legal challenges and ballot-counting processes are resolved in the courts.

All election disputes at the state level need to be wrapped up by December the 8th so that the electors can cast their ballots by December the 14th. But it’s not until January the 6th that the new Congress counts the ballots.

However, what is supposed to be a straight forward process, if the legitimacy of any of the State’s counts is put into question, the governor could choose to not to certify the Elector’s votes.

Or, the state legislature could even decide to contest the result of the election and send a different count to Congress, meaning Congress could end up with no results or even competing results from the same state. 

The last contested election was back during the Bush/Gore election in 2000.

The S&P 500 only dropped about 5%, however, the playing field is entirely different in 2020. 

The US economy was booming back then when the government’s budget was in surplus and the moderate differences in policy between the two candidates meant that markets could price in a relatively similar fiscal outlook.

By contrast, a disputed election in 2020 would occur in the middle of the biggest economic event in a lifetime, during a world pandemic and global recession, unprecedented government deficits, and deep partisan divides over potential economic policy.

Without a new stimulus package and the associated Fed support for financial markets, a contested election could cause a painful market correction.

As shown in the chart below, the S&P 500 could drop to 3000 before finding the next major technical support.

That represents about an 8% drop from current levels and that before potential rioters take to the streets and start burning down Main Street again as they did back in May of this year following the death George Floyd when unrest quickly spread across the entire United States.

Cutting short a complicated dispute procedure, for markets, it would mean a long drawn out period of uncertainty and very likely, a painful correction as the chart below illustrates 

But no matter what happens, someone has to take the honour of oath on January 20th and aside from which candidate does, the first item on the agenda for the newly installed President and Congress will be a COVID-19 stimulus bill.

The political uncertainty could be somewhat offset by the prospect of $2 trillion in newly printed cash flooding into financial markets, at some point. 

Fed to play second fiddle, but will be key in 2021

Equity markets should also take extra comfort in the Federal Reserve’s support, especially when considering how the recovery during the epidemic has been largely fueled by aggressive money printing by the Fed.

For instance, in quick a study of technology fund purchases, they have climbed in virtual lockstep with the money injections by the Fed. Also to note, the Fed suspended its money-printing activities for the past few months seeing as there has not been any further deficit spending to finance. Without fresh cash injections, the demand for stocks stalled in May which consequently sent markets down about a 7%. 

At the forthcoming meeting, markets will therefore be relying on the Fed to reassure them that fiscal and monetary steroids are likely to be applied in 2021.

This may be communicated during the press conference on matters relating to QE rather than through any unlikely changes to FOMC statement and explaining again, with an emphasis on covid, that ”the path of the economy will depend significantly on the course of the virus.”

However, overall, and unless there is a financial plumbing issue in the aftermath of the election that might call the Fed to address, the Fed meeting will largely be overlooked a day after the election but will become a critical catalyst in 2021 and after January 20.

S&P 500 daily chart

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