The stock market as defined by the S&P 500 has pulled back 10% recently, the NASDAQ more like 14%. Many regard this as a well overdue pullback and now staring at a number of challenges, the markets may have a difficult time rallying to new highs in the near term. First and foremost the election is starting to loom. Here in our posts, we don’t get political to one side of the spectrum or the other. For the most part, that is due to our disdain for politicians in general, but with this election especially, there seems to be a justifiable unrest on both sides of the isle. Our opinion is that it will represent more volatility in markets although we are not really sure which direction for which candidate. So we will take the easy way out and just warn for caution in general with regard to election effects on the market.
Part of the political unrest is amplified by the vacancy in the Supreme Court. Although vacancies have opened in an election year 29 times historically, this is an extreme circumstance and understandably has many on the left very uneasy.
Then, we have the situation with the next iteration of the Cares Act. The first go around in March was only $2.2 trillion in “fiscal stimulus” so naturally, many are waiting around for Round 2. Of course Congress and the Senate can’t agree on who gets what (shocker) so that doesn’t appear to be progressing any time soon. Some of you may be reading this thinking “good – we don’t need to hand out any more free money” to which we would normally agree. This time around is pretty interesting, however with as many unknowns as are left hanging out there. Will student loans have to be repaid? Will landlords be able to evict those that haven’t paid according to the rental agreement (the moratorium expires in Dec.)? What will bankrupt states and municipalities do with many of their bills coming due and unemployment benefits not financed? What will those out of work do now that the unemployment checks are running out? Lots of questions without answers and Morgan Stanley’s public policy strategist, Michael Zezas is saying that there is only a 33% chance that any version of the Cares Act 2 will be passed by November 3rd.
Additionally, North America is now running into the fall season and another round of the Covid may put a damper on economic recovery expectations. We really don’t have an opinion of exactly what will happen with economic lockdowns because of a potential resurgence of the virus. That is completely up in the air – but we do add it to our list of concerns.
Next up on our list of concerns for the stock and bond markets is that it appears long term interest rates have bottomed. The ten year treasury note interest rate cratered between March and Sept from about 2% to about .5% - really a 75% reduction in interest rates! That has at least helped fuel the rally in stock prices as it has obviously defined the rally in bond prices. It appears that without another serious economic fallout from a resurgence of the virus or some other factor, long term interest rates may have hit a bottom (ten year treasury back to .65%)
Last but certainly not least is the uncertainty of what sort of asset purchasing the Federal Reserve will do. The Federal Reserve has been a vacuum cleaner of mortgage backed securities, treasury bonds and yes even corporate bond (junk bonds too) ETFs in the last six months. Take a look at what they have in total on their books…
Three trillion dollars worth of assets got stacked onto their books within a month of the corona virus outbreak. Never mind whether or not the FED has the authority or mandate to do so – they did it. The question now is how/when/if these asset purchases continue. Intuitively, one would think the FED would try to let markets stand on their own now that some normalcy has returned. However, one can now be relatively certain that the FED will backstop any significant pullback in asset prices for the foreseeable future. The 200 day moving averages of the major indeces (Dow, S&P, NASDAQ) will certainly be defended (asset managers buying stocks at these levels to support prices) if we continue the pullback to those levels. Stay tuned!
Regards and good investing!