What's behind the sell-off? What's behind the sell-off? http://www.federatedinvestors.com/mmdt/static/images/mmdt/mmdt-logo-amp.png http://www.federatedinvestors.com/mmdt/daf\images\insights\video\political-map-businessmen-small.jpg October 28 2020 October 28 2020

What's behind the sell-off?

Spiking Covid cases, no extra stimulus and a possible contested election.

Published October 28 2020

Worsening Covid news, failed stimulus talks and tightening races in battleground states are weighing on risk markets, with the S&P 500 off 5% and the 10-year Treasury yield down 10 points so far this week. None of this comes as a surprise—we’ve been expecting a 5-10% pullback, with an eye toward eventually adding to stocks on our still-bullish longer-term outlook. With just a few days before the election, we’d like to see how it plays out before considering any action.

Of the three headwinds, the jump in Covid cases is most worrisome. The 7-day average of cases has surged above 70,000 for the first time since the pandemic hit, and expectations are daily case counts could reach 130,000-140,000. While hospitalization, intensive care and death rates continue to stay relatively stable, this increase in the absolute number of cases threatens to pressure hospital systems and spur a new round of restrictions and lockdowns. That’s already happening in Europe, where case increases also are spiking. The risk is a similar reaction here (renewed shutdowns, stay-at-home orders, etc.) could stall a recovery that, as tomorrow’s initial Q3 GDP print will show, has been on a tear.

As for more fiscal stimulus, the market was disappointed policymakers in Washington failed to deliver before the election—there were hopes as late as this past weekend that a deal may get cut. While the overall recovery appears to be self-sustaining even without imminent additional aid, certain industries such as airlines and hospitality (hotels, restaurants, tourism) that are under severe strains will suffer further, missing out on much of what typically is a big holiday travel and entertainment season in the months ahead. It’s difficult seeing the overall economy getting back to full health if these industries don’t.

Markets won’t like a contested election

Which brings us to the election. A week or two ago, the market was firmly expecting a Democratic sweep. Since then, polls have tightened, with Republican Senate candidates gaining ground in Arizona, Maine, North Carolina, Iowa, Colorado, Montana and Michigan. At the same time, while former Vice President Biden continues to hold a 7% lead nationally, according to today’s RealClearPolitics average of polls, his leads in several key swing states have narrowed, including Pennsylvania, Florida, North Carolina and Arizona. Two pollsters, Trafalgar and Susquehanna, are predicting a narrow Trump Electoral College victory. While stocks ultimately may prefer such an outcome, they are concerned a contested election clouds prospects for further stimulus anytime soon.

So how does this trifecta of worries impact our outlook? Frankly, it doesn’t. We always have believed the next few weeks could be tricky, which is we have kept our equity overweight and value tilts modest in size. Our plan remains to patiently use weakness to add to this positioning, given our view that by Jan. 20, we will have a president with less political uncertainty in front of us than behind us, stimulus in place or on the way, a Fed that is still not thinking about thinking about raising rates, further development of Covid-19 treatments and vaccines and some of the easiest year-over-year economic and corporate earnings comparisons on record. While we are vigilantly watching the developments on the virus and election fronts, at this point, we continue to think that is the right plan.

Tags Equity . Politics . Coronavirus . Fiscal Policy . Markets/Economy .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

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S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

Stocks are subject to risks and fluctuate in value.

Value stocks tend to have higher dividends and thus have a higher income-related component in their total return than growth stocks. Value stocks also may lag growth stocks in performance at times, particularly in late stages of a market advance.

Federated Global Investment Management Corp.

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