On the surface it seems like a ripe situation for stock market disaster, given the tumultuous year the world has been thrown into. However, if we take a closer look, we see some valid reasons for Wall Street’s optimism.
The market’s success will depend on the trajectory and strength of the coronavirus as well as the presidential election. As we can see, the election is somewhat dependent on the strength of the economy given our country’s current circumstances.
COVID-19’s Digital Transformation
COVID-19 is highly contagious and has only been contained through the imposition of strict lockdowns and stay-at-home orders. Since experts agree that we are still in the midst of the first wave, it’s unknown if a second wave is underway. On the plus side, most countries are now better equipped to manage a potential second wave in terms of health care capacity and treatment. The outlook on vaccine development is promising, although 2021 is the most optimistic and realistic timeline.
The pandemic has accelerated the growth and market power of the major technology platform companies by several years. It has created a glimpse into how they will continue to operate since we know that every interaction can be digital. The response to the COVID-19 crisis — social distancing — has accelerated this powerful trend of digitizing the world; services that were already useful have become essential in some cases. Many people confined to their homes felt compelled to try grocery delivery for the first time and Netflix NFLX subscriptions skyrocketed.
There’s still plenty of room to advance with this trend. While e-commerce has grown in popularity, it still represented only about 11% of U.S. retail sales last year, according to Business Insider, and mobile payments stood at similarly low levels. Whether or not the pandemic continues to keep people sheltered in their homes, e-commerce will inevitability grow, as people have now adapted to these convenient services.
The 2020 Election Also Plays A Role
Historically speaking, presidential elections have essentially made no difference when it comes to long-term investment returns. The U.S. stock market has powered through every election since 1933, reaching new highs over time regardless of whether a Republican or a Democrat resided in the White House. However, the 2020 election is too close to call, and there is nothing that bothers the markets more than uncertainty. They will become an even bigger focus for markets if the Democratic nominee, Joe Biden, takes a decisive lead. Biden plans to at least partially reverse President Donald Trump’s 2017 corporate tax cuts, which could deliver a hit to earnings per share in 2021.
Another key watchpoint will be the election outcomes of the Republican-led Senate. Democratic control of the White House, Senate and House of Representatives would make a corporate tax hike much more likely and create the risk of more intense corporate regulation.
By design, elections have winners and losers, but in the long run, the real winners have been investors who avoided the temptation to time the market and stayed in it for the long haul.
The Economy and Inflation Fears
Federal stimulus checks have kept the country afloat for now and seems to have gained the confidence of Wall Street, especially with the prospect of a second round of stimulus checks. But the infusion and printing of money will have obvious consequences; inflation is a major concern as the value of a dollar continues to get watered down. This will take some time to play out, but most professional investors should see it coming. On the other hand, we’ve been seeing a spike in gold and silver prices, so investors must stay on top of these trends.
China Trade War Unlikely
A recovery in the stock market and the economy provide President Trump with his best chance of re-election. We expect he will not endanger this by re-starting trade hostilities. This prediction could change if Trump’s poll ratings show him in a losing position a couple of weeks out from the election. If so, he may take on more strong stances on nationalism and public China-bashing to increase his chance of victory.
The Big Picture
Active management may play more of a role, allowing for strategic and tactical portfolio management. According to research conducted by the U.S. National Bureau of Economic Research, during the pandemic, most active funds had underperformed passive benchmarks. Thus, we have found it beneficial to add more actively traded portfolios to our offerings.
Overall, expect a bumpy path for U.S. markets in the final months of 2020 as the economy comes back online, followed by a (potentially) more solid recovery in 2021.