Market Update - October 2020

Equity markets remained hesitant in October, with a U.S. fiscal stimulus package still pending and several European countries announcing restrictions to slow the spread of new coronavirus cases.

Yet while it may seem like the markets took a dive in October – a closer look at the chart below shows that stocks have been evolving with no clear direction for three months now. The S&P 500 has been moving up and down nearly +/-10% around its pre-COVID level since August for a net performance of 0.0% over the period.

That said, with the US election ‘almost’ behind us, we will soon have one less thing to worry about!

Markets have reacted in a very positive way to the election over the past two days. My best guess is that this is due to a combination of three reasons: 1) A Biden Presidency combined with a Republican controlled Senate could offer the potential for significant fiscal stimulus (Democrat Agenda) and low taxes (Republican Agenda) – a best of both worlds scenario in the short term. 2) Markets may have been oversold heading into the election - voters were mainly choosing between the ‘status quo’ or the ‘previous status quo,’ neither seen as a major extreme. 3) It seems investors may all have had the same idea with regards to ‘waiting for the election’ before investing new money. As I have commented over the past few months, the world is awash in newly printed cash and there are few productive places to put it (the stock market being one of them).

Looking beyond the potential for short-term turbulence, it is important to reiterate that we expect this new bull market to steam ahead over the medium term, regardless of the election outcome. If we look at stock market performance six months after all Presidential elections since 1980, we find that what the only two negative years (2000 and 2008) had in common was not the color of the winning party (red in 2000, blue in 2008), but the fact that we were in the early stages of a recession (chart below). Since neither candidate is likely to completely halt the ongoing global economic recovery with his policy agenda, neither should have an outsized impact on the direction of equity markets over the next six to twelve months.

Once the election is behind us, two major issues must be clarified for the stock market recovery to move to the next level: 1) When will a fiscal stimulus package be passed and, (2) more importantly, when will a more permanent solution to the pandemic be introduced?

Regardless of who wins the election, the new congress will not commence until January 3,rd with the Presidential inauguration taking place on January 20th. What does this all mean? Some form of political wrangling between Democrats and Republicans over the passage of a fiscal stimulus package should continue for at least another three months (the so-called lame-duck session). With any large-scale stimulus package unlikely to be voted on before 2021 (chart below).

Ultimately, the big questions for investors is neither the size nor the timing of the fiscal stimulus, but whether a permanent solution to the pandemic – the very reason we need government support – is on the horizon. This is of even greater concern since the increase in COVID-19 cases has forced several EU countries to announce new containment measure in October (chart below).

For now, these measures remain in line with our base-case scenario - calling for the use of more targeted restrictions (less damaging for the broad economy), not a return to the total lockdown of early 2020. These measure include: closure of restaurants, bars, gyms, cinemas and restriction on gatherings, all the while keeping most businesses and schools open. We saw similar measure taken in Quebec in early October, with promising results in a reduction of new daily cases (chart below).

Moreover, in the words of Dr. Fauci, “we will know whether a vaccine is safe and effective by the end of November, beginning of December.” While it is impossible to know for certain whether leading vaccine candidates from the likes of Pfizer, Moderna, Johnson and Johnson and AstraZeneca will prove safe and effective, recent reports seem somewhat promising. We are now seeing an uptick (chart below) in the probability for a vaccine by end of this year or early next. It is important to note however, that due to the limited amount – vaccinations will likely first be made available to front line care workers, as well as those who are most vulnerable.

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