October Market Overview
October was an eventful month with many dynamics influencing the markets, some positively and some negatively. By the end of the month, most U.S. and global indexes had declined, many by several percentage points; however, U.S. Small Caps and Emerging Markets gained.
Broadly speaking, we believe the most significant contributors to the market’s decline were the failure of Congress to reach an agreement on another stimulus package, as well as the widespread increase in COVID infections across the country, which have resulted in more restrictions in many municipalities, and which may prolong the economic recovery.
October was also an extremely busy month as many companies reported third quarter earnings results. These too were a mixed bag, as most companies beat analysts’ expectations on both the top and bottom lines, though in some cases results were not good enough. Many investors had expected even more, and some companies remained cautious on the path of the recovery.
Speaking of the recovery, U.S. GDP climbed a remarkable 33.1% in the third quarter versus the second quarter. Of course, the second quarter had declined 31.4% versus the first quarter, so the bar was very low.
Naturally, there was also much focus on the U.S. elections throughout the month of October as investors sought to position themselves for the outcomes they believed would transpire. While a Biden win was initially believed to be a potential negative for U.S. equities because of his stance on corporate taxes, this viewpoint changed as another round of stimulus funding failed to materialize and as investors increasingly felt that a democratic sweep was the most likely outcome from the elections. Investors reasoned that a democratic sweep would ultimately result in a much more substantial stimulus package that would easily be passed through Congress and that this would outweigh a potential increase in the corporate tax rate.
Ultimately, the election was more competitive than investors anticipated, and while Biden is poised to be the next president, it appears that Republicans are likely to maintain control of the Senate. If this scenario ultimately comes to fruition, it will be challenging for Congress to reach an agreement on another COVID-related stimulus package, which could negatively impact markets in the short term. Nevertheless, we view a divided Congress positively for the markets over the longer term because this provides corporations a greater sense of stability which, in turn, affords management teams greater confidence to make investments that positively impact the economy.
As we are sure our readers are aware, the Trump administration is questioning the validity of the vote and we anticipate some degree of legal wrangling in a last-ditch effort to turn things in his favor. We do not expect such a challenge would be successful, though this scenario could result in some market volatility in the coming weeks.
In terms of Fixed Income, yields rose across the curve, resulting in slight declines for most Fixed Income indexes. We attribute the movement in Fixed Income to investor expectations for a democratic sweep on election night, which was believed would lead to positive economic developments, causing a modest reflation trade to take hold. Regardless of the movement in yields over the course of a month, the Federal Reserve has not strayed from its message that rates are likely to remain very low for a prolonged period of time.
As the election rhetoric fades away, we believe the most significant known risks relate to the development of COVID-19. We remain steadfast in our belief that it is a global imperative to get the pandemic under control; an effective vaccine will be a great start, although we know it will take time before it will be widely available. Until then, we do not believe the markets are entirely out of the woods, though we are encouraged by the progress of the economic recovery thus far.
The monthly Market Overview is written by two members of MACRO’s Investment Committee, Mark Cortazzo, CFP®, CIMA®, and Christopher Moffett, CFA.
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