By Jan Faure
US equity markets declined for the firsttime since March on waning fiscal support and US election concerns.
Global markets were always going to be challenged in September following the major stock market gains made in August which intensified concerns over lofty valuations, especially in the highflying technology sector. The S&P 500 Index declined by 4.7% in September driven by delays to an additional fiscal stimulus package, an increasingly heated US election campaign, and the threat of renewed lockdowns in Europe due to rising COVID-19 cases. Continuing tensions between the US and China also played out in September with President Trump attempting to block Chinese social media apps TikTok and WeChat due to alleged security concerns.
The US Federal Reserve announced mid-September that it doesn’t expect to raise interest rates until the end of 2023 at the earliest. A key takeaway for markets was that the Fed has largely done what it can, and further support would need to come from Congress (i.e. fiscal stimulus) to underpin the recovery.
A major worry for markets is whether the US will pass an additional fiscal stimulus bill after the previous aid package (the CARES Act) expired at the end of July. This support package kept consumer spending, the lifeblood of the US economy, going. Democrats are pushing for a new $2.2 trillion package while Republicans would like to come in below $1 trillion. Without a new support plan, the US economy will very likely relapse. As BCA Research put it, “A complete refusal to add fiscal stimulus would nearly guarantee a double-dip recession.”
As it stands, there is an expectation that there will be a deal made in October. The White House will not want voters experiencing financial strain during the November elections.
The next two to three months is likely to be a period of heightened volatility and downside risk. The US election season got off to a stormy start on Tuesday 29th September with the first presidential debate. It was a decidedly chaotic and fiery event and has set the tone for an election season that will be anything but smooth sailing. It also added to concerns that Trump would contest an election result that doesn’t go his way. One market analyst commented, “we are seeing a president that increasingly speaks of voter fraud, which appears to show a candidate laying the groundwork for defeat.”
Notwithstanding the aforementioned risk, looking at the two primary asset classes of equities and bonds, it is equities which look a better bet over a 12-month investment horizon. For one, the S&P 500’s dividend yield stands at around 100 basis points above 10-year US Treasury yields. This gap is even wider in other developed markets in Europe and Asia. The global monetary environment is also highly supportive of stocks as the low interest rate environment boosts equity valuations. Central banks will not meaningfully ease policy further, but monetary conditions are already at their most accommodative ever.
GLOBAL INDICATORS: Local reporting currencies