Over the past month, the market has gotten choppier. Without steadfast leadership from the mega-caps, it appears the S&P 500 has been more susceptible to quickly changing sentiments. Though the index only fell roughly .6% this week, it felt rocky with several large intraday swings. Three days this week had an intraday move of over 2%. So what is driving this?
There is no doubt that economic momentum picked up as the economy opened up through the summer. With kids back in school and students returning to college, the improvement in virus numbers has slowed along with the economic momentum. We are still moving in the right direction but at a slower rate. Last week, we wrote that economy was turning the corner. We believe this continues to be true, but the rate of growth is also important. We need to sustain a high rate to reverse the damage that has been done. The longer it takes, the more temporary job losses turn to permanent job losses. This is a number that is creeping higher and one that we should keep an eye on.
Also, the Fed has been the market’s greatest source of support through the rally. They are still there but have increasingly encouraged fiscal policy in lieu of additional measures of their own. With a looming Supreme Court fight in Congress, a second round of stimulus looks unlikely. The market is beginning to have a tough time digesting this with the economic work that remains to be done. It is possible that without additional fiscal or monetary policy, the market lacks a catalyst to move above the September high. Something needs to give on this front.
Politics are also heating up. President Trump’s odds of re-election are correlated with the progression of COVID-19 and, thus, economic momentum. If the latter two are stalling out, so is Trump’s momentum. Trump winning hasn’t been terribly important for the rally in stocks to this point. Some of the sharpest points in the rally came when Trump trailed by double digits in the polls. What we continue to believe is of greater consequence is the direction of the Senate. From July to August, the odds of the Senate turning blue fell substantially. When the calendar turned in September, those odds began to reverse. It may not be coincidental that the market has corrected since then. It is a probability that needs to be discounted. Though it should be noted that one of the best indicators of where the Senate might be headed is not showing up blue. High tax companies are not underperforming low tax companies. If Democrats were going to take the Senate, we’d expect that to be the case. It may be closer than the odds suggest.
So why be bullish? Interest rates appear to remain low for the foreseeable future, there is plenty of cash still on the sidelines, some growth stocks are now trading over 10% below their highs, many companies are continuing to grow dividends at an impressive rate, and the market stopped falling at a key technical level. The S&P 500 halted its slide at just over 10% below the early September high and immediately reversed higher. We look for the 3200 level to be good support going forward. If we can hold this level, there is a lot to like about the market. It may not be a smooth ride as the market sorts through COVID-19, stimulus, and politics, but there are still plenty of building blocks.
Preston May, CBE®
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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.