The S&P 500 Index returned 3.89% last week, its best performance since the shortened holiday week ending July 2. October has shown a welcoming start for equity investors following a disappointing September. After recording an all-time closing high on September 2, the index slid over a three-week period posting a -3.80% return for the month, its first negative monthly performance since March. Equities opened up on Monday on news that President Trump was recovering from coronavirus symptoms and could be leaving the Walter Reed hospital later that evening. The positive trend was reversed Tuesday afternoon when President Trump tweeted he was stopping stimulus negotiations until after the election causing the index to decline over 2.00% in the last 75 minutes of trading. Stocks were headed back up on Wednesday on hopes that some stimulus could still occur as President Trump encouraged lawmakers to provide immediate approval of $25 billion for the airline industry, aid for small businesses, and $1,200 stimulus checks for jobless Americans, in contrast to the large comprehensive aid package of $2.2 trillion proposed by Speaker Nancy Pelosi.
All sectors were positive last week with the top sectors being materials and energy which was helped by the rise in oil prices due to Hurricane Delta. Crude oil closed at $40.60 per barrel on Friday, climbing 9.58% for the week. Top energy names included Cabot Oil & Gas Corp, Halliburton Company, TechnipFMC PLC, and Occidental Petroleum Corp, and top materials names included Corteva Inc., Martin Marietta Materials Inc., Lyondell Basel Industries NV, and PPG Industries Inc. Information technology company Xilinx Inc. posted the best performance in the index last week, returning 17.89%. The stock jumped Friday on news that Advanced Micro Devices Inc., also known as AMD, is in talks to acquire the smaller semiconductor company. Domino’s Pizza Inc. posted the worst performance in the index last week, returning -9.87%. The stock dropped on Thursday after missing earnings estimates. Earnings announcements expected this week include Johnson & Johnson, UnitedHealth Group Inc., JPMorgan Chase & Company, Bank of America Corp, Honeywell International Inc., Wells Fargo & Company, and many others.
With the national election just three weeks away we are getting more questions about what we think will happen to the Economy and Markets if Trump wins or if Biden wins? What will happen if the Republicans hold or lose the senate? What will happen if the Democrats hold or lose the house of representatives? All of these are great questions and there are multiple scenarios that we think will affect the Economy and Markets. The difference between the parties and candidates is the 180 degrees from each other making this one of the most consequential elections in our countries history. The two Presidential candidates are different in every way as well as their party platforms. We are only going to look at the economic policies of the two candidates platforms and what some of the changes proposed would do to our countries economy and Markets. Here is what we see playing out as we head into this year's election on November 3.
Base Case for Bullish U.S. Equity Forecast:
- M2 is growing at +23% year/year (M2 is closely watched as an indicator of money supply and future inflation, and as a target of central bank monetary policy.)
- The Fed is willing to expand the size of its balance sheet (currently $7 trillion) further should economic conditions deteriorate
- Few overwhelming signs of speculative excess; flows into domestic equity ETFs and mutual funds have remained negative in 2020
- Current major wall street firm analyst’s expectations for S&P 500 earnings growth are running at 27% in 2021
- Current policy mix creates more growth opportunities for asset allocators and fiduciaries (greater exposure to equities)
- The potential for political clarity could make decisive fiscal policy actions easier to achieve (an additional and reasonable relief package will be passed after the election)
Major Risks to the Forecast:
- 2020 election leads to higher taxes on income, corporate profits, capital gains, dividends, and estates and a re-rating of earnings multiples
- 2020 election leads to tighter regulatory policies, especially on the Financials and Energy sectors
- Concurrently expansive fiscal and monetary policies could lead to greater inflationary pressures sooner-than-anticipated if taxes and regulations are raised at the same time
- Sell-side earnings from major wall street firms' expectations may be currently too high, rendering already-rich market multiples vulnerable to economic and policy shocks and market volatility and market selloffs more uncertain and pronounced.
The Bottom Line:
If the country follows the low tax, reduced regulation, and fair trade policy under the current administration, the economy and markets will continue to do well. The “V” shaped recovery we are currently seeing will certainly continue and we will be back at full economic output in late 2021 early 2022. Job recovery from the Coronavirus shutdowns would recover quickly. Even if many small businesses close for good, the favorable tax and regulatory conditions will foster current small business owners to grow or expand through opening new locations or buying competitors. It would assist new entrepreneurs to open a new business. Both of these outcomes will help hire back unemployed workers in that industry.
If a new administration takes over and raises taxes, increases regulations, and goes back to the old trade policies that were in place previously. The economy and markets will certainly head lower and the “V” shaped economic recovery we are currently witnessing will revert to something like a square root recovery where the “V” flattens out and even tends lower. Small businesses that had to close during the pandemic will certainly never reopen because regulatory conditions will not be favorable, it will be less likely to see small businesses take a chance through acquisition or expansion to assist in getting people from closed business’s back to work. New entrepreneurs will be less likely to open a new business because of the higher costs associated with tougher regulations. You will have high unemployment levels for a much longer period.
We are currently coming out of the shortest self-induced recession our country has ever witnessed. Q3 GDP is projected to be greater than 35% annualized growth, the largest recovery in our Country's history. If the elections force us to change course in pro-growth policies in Washington, then the chance of back to back recessions raise; to avoid back to back recessions the, Government would likely need to continue its aid packages because increased taxes and regulation would likely reduce private business's ability to pick up the slack as they continue to grow. We do not believe we are likely to see enhanced government aid while raising taxes because the government would in essence be putting money in the system so they could attempt to re-collect the aid through higher taxes.
Please call or email if you have any questions or comments.
Source: First Trust, Strategas
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