October 2020 Stock Market Commentary

As election “day” turns into election “week”, we still await official results of the Presidential race and several key Senate seats. At the time of this writing, it appears that Joe Biden will be our next President, with Republicans retaining control of the Senate. Markets have reacted favorably to this scenario so far, and while we leave the punditry to the so-called experts, we offer a brief interpretation for the jump in equities so far. Biden will be eager to push through additional stimulus to help jumpstart the economy as one of his first acts in the White House, while Mitch McConnell will provide balance from the Legislative Branch and help limit any potential government overreach, easing fears in areas such as corporate regulation and taxation.

That said, our base case view coming into the election was that volatility would increase heading into the event (which it did), but getting a result (or in this case, a presumed result) would act as a pressure release valve. So far, that playbook has been true to form. We turn to the data as our best guide for what to expect heading into year-end and 2021. As always, we interpret everything through our proprietary Three Dials lens, which during the month of October ticked up one notch. We summarize our month-end Three Dials readings below:

1. Market Sentiment and Momentum: Positive 

Despite choppy action from the S&P 500 that saw a second consecutive monthly decline of at least -8%, buyers continue to step in at support levels and sustain an upward trending market. The S&P suffered a -2.7% loss in October, though the index is still up +2.8% for the year, quite a feat considering the steep COVID-related selloff in February and March. Elsewhere, international equities fared slightly better for the month, falling -2.2% in October, though the MSCI ACWI ex-US index is still down -7.5% year-to-date. Of note is the performance within Emerging Markets, which gained +2.1% on the month and returned to positive territory for the year. On balance, equity markets are holding onto the uptrend that began with the March lows, which leaves our Momentum Dial in a Positive position.

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2. Economic Fundamentals: Neutral
   
   

Economic data continues to pick up in the U.S., with key areas such as employment, housing and manufacturing experiencing solid sustained growth over the past five months. Given the current base case for continued fiscal stimulus, the domestic economy is on far firmer footing than it was at the end of Q1. However, with record numbers of Americans still unemployed and the overhanging threat of a potential COVID resurgence and related shutdowns, we are not fully out of the woods just yet. As a result, our Fundamental Dial has ticked up from Negative to Neutral.

3. Valuation: Negative

While Q3 earnings in the US have been largely surprising to the upside, we still see a valuation problem, with price-to-earnings ratios sitting well above their short and long-term averages. While there is a chance that stocks grow into their lofty valuations, this scenario creates an equally dangerous risk to the downside. As such, our Momentum Dial continues to show a Negative reading.

On balance, our Three Dials composite reading has ticked up one notch from last month, with equal amounts of optimism toward a brighter future and caution against the continued risks on the horizon.

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Sources:

[1] https://www.morningstar.com/

[2] https://fivethirtyeight.com/live-blog/2020-election-results-coverage/

[3]https://www.conference-board.org/pdf_free/press/US%20LEI%20-%20Tech%20Notes%20OCTOBER%202020.pdf

[4] https://fred.stlouisfed.org/series/CCSA

[5]Factset.com