Back to Earth
6.12.20
Last week, the market was nearing the doorstep of its old highs, but a dose of COVID-19 reality has suddenly set the S&P 500 back around 5%. This week saw some of the heaviest selling action since the early days of the crisis as it seems a rise in COVID-19 cases in early opening states spooked participants. For the first time in a while, the market weighed the possibility of a slower than expected restart. While it doesn't appear likely that the country will be forced to shut again entirely, it could be some time before people and businesses return to exerting their full economic might. Combined with a historically weak seasonal period and an approaching election, the rally may have just entered its long-awaited phase of consolidation. While we never like to see 5+% down days, we believe a pause is healthy and likely warranted at these levels.
The S&P 500 is trading at 3041 after this week's action. We think that there is strong technical support in the 2900 ballpark, which is roughly 4.6% lower from where we are. If added to this week's pullback, that would get us close to a full 10% correction. This type of consolidation is perfectly normal and something we'd expect to see after the 43% rally off of the March 23rd low.
Corrections are never comfortable, but we're taking care not to forget that the Federal Reserve is a powerful force. This week, Chairman Powell indicated that the Fed Funds rate will stay at current levels through 2022 at least. In addition, we have no reason to doubt that the Fed would fight a second wave of the virus with the same vigor it showed in the first. With that in mind, there appears to be a Fed put under the market for as far as the eye can see. We're confident in our expectations of the long-term outlook for the market.
That's not to say that the road between here and there won't be bumpy. Over the coming months, we suspect the market will increasingly turn its attention towards the election. History shows that the market tends to sell-off during the three months ahead of the election if the incumbent party goes on to lose. Right now, the consensus is that the Democrats will unseat the President and take control of the Senate in the process. If that is the case and history is a guide, the market is likely in for a weak stretch. Still, five months is an eternity in politics, and a lot can happen. Nonetheless, the stock market has historically been a remarkably good predictor of electoral outcomes, and we'll let it tell us where to go. We'll be on the lookout for risks or opportunities as they present themselves.
Preston May, CBE®
Research Analyst
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S&P 500: Standard & Poor’s (S&P) 500 Index. The S&P 500 Index is an unmanaged, capitalization-weighted index designed to measure the performance of the broad U.S. economy through changes in the aggregate market value of 500 stocks representing all major industries.