By Jan Faure
Coronavirus resurgence in Europe and the US leads to major profit taking in final week of October.
With memories of February and March’s market collapse still fresh in investors’ minds, it was little surprise that October’s surge in coronavirus cases in Europe and the US would rattle the market bulls. Concerns over a delayed US fiscal stimulus top-up deal and a contentious US election added to market jitters. The S&P 500 index declined 5.6% in the final week of October while Europe’s Euro Stoxx 50 index declined 7.5%. The two market indices ended the month down 2.8% and 7.4% respectively.
Particularly hard hit were the high-flying technology stocks. Information technology was the worst performing sector in the S&P 500 in October with many big-name tech stocks suffering double-digit declines. A notable risk ahead for the likes of Facebook, Alphabet (Google) and Microsoft is consensus in Washington for greater regulation as well as efforts to cut their market dominance. The risk to the overall US market from major tech stocks cannot be underestimated. Apple, Microsoft, Amazon, Facebook and Alphabet now make up 23% of the S&P 500 index.
Major European economies including England, France, Germany, Italy and Spain have reintroduced national lockdowns or stringent curfews. In the US, daily Covid case numbers reached record levels just days before the presidential election on November 3rd. The US has the unenviable status as the world leader in both case numbers and death counts. Things are so bad that the medical journal The Lancet joined other prestigious publications including the New England Journal of Medicine in urging Americans to vote for change in the coming election.
Despite the surge in coronavirus infections, it is unlikely to have the same impact on markets as was the case in Feb/March. There is now a far greater understanding of the virus as well as more effective and advanced treatments resulting in higher recovery rates. A viable vaccine is also supposedly within reach.
Agreement on a new US fiscal stimulus deal, critical to a lasting US recovery, has remained deadlocked in Congress. Negotiations over the coronavirus financial relief package will now continue after the US elections. A Democratic sweep of both the White House and Congress would very likely bring about a far bigger fiscal relief package to combat the economic harm from the pandemic, as apposed to a Republican win. This would be a big boost to the US economy and supportive for equity markets in the short-term. Over the longer-term, a Biden administration would aim to reverse some of Trump’s corporate tax cuts and increase regulation across a number of industries. This would be negative for US companies.
November will likely see a continuation of volatility. No matter the result in the US election, markets will take time to digest the implications for America (and the world) for the next few years. It is widely regarded as the most significant election in US history. A win by the Democrats could see some significant sentiment shifts in certain sectors of the US economy. A risk outlier would be a contested election which would be extremely negative for stock markets.
Beyond the election result, November will also be telling in terms of the severity of growing coronavirus infections in Europe and the US. The resurgence adds further strain to the global economic recovery. Underscoring global uncertainty has been the lack of profit forecasts from most listed companies. Companies are finding it difficult to forecast demand in an environment where new restrictions are unpredictable and can severely impact business.
GLOBAL INDICATORS: Local reporting currencies