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Investors head to the sidelines as the election looms

November 02, 2020


  • Equity markets saw their worst week since June as record coronavirus cases and election uncertainty sent investors to the sidelines. The selloff was remarkably consistent, with the Russell 1000 Growth Index, Russell 1000 Value Index, Russell 2000 Index and MSCI EAFE all down nearly identical percentages last week. The risk-off environment resembled the “flight-to-liquidity” from earlier in the year, with traditional safe-havens such as Treasuries and gold selling off. Markets are attempting a bounce on Monday, though confidence in the rally is limited.
  • Investor sentiment has collapsed rapidly in recent weeks, reflecting the return of emotion to decision making. CNN’s Fear & Greed Index has fallen to 30 on a scale from 0-100, down from 75 less than two weeks ago and the lowest level since June. We see similar collapses in Global Fear & Greed and Bloomberg Financial Conditions. The VIX briefly topped 40 for the first time since June as investors use options to position around uncertainty. Many hope that a resolution to the election will settle investor emotion, though many other uncertainties remain, likely keeping volatility elevated.


  • Election day looms, with polls continuing to show Joe Biden with a healthy lead. The RealClearPolitics average of polls shows Biden with an 8% lead, with a 3% lead in battleground states and the betting odds showing a two-to-one advantage. Democrats have a roughly 50% chance of sweeping the White House and Congress. While polls told a misleading story in 2016, experts are more confident this time because of the consistency and stability of the gap. Equity markets have historically rallied following election resolutions, as markets crave certainty, though the prospect that we may not know the winner by Tuesday night or Wednesday morning adds uncertainty. Betting markets embed a 40% chance we will not know until at least Thursday.
  • With roughly two-thirds of companies in the S&P 500® having reported, the percentage of companies beating expectations is 86%. If this holds, it will exceed the previous record of 83% in the second quarter and compares with an average of 65%. The magnitude of the beats is impressive at about 19% above expectations, though the stock price reactions to beats have been muted, suggesting the bar has been raised and investors are fixated on the election and coronavirus. The estimate for 2021 has rebounded to the best level since March at $168, bringing the valuation based on that number below 20x.
  • Reported coronavirus cases continue to surge, with the seven-day average up 25% over the past week. The seven-day average of hospitalizations hit a record high in 18 states, centered in the Midwest. The bounce is being blamed on colder weather, school and business reopenings, along with general lockdown fatigue. In Europe, the U.K. became the latest country to add fresh mitigation measures, joining France, Germany, Greece, Belgium and Austria. New York and New Jersey are contemplating new travel limitations, though there seems to be little support for a new wave of lockdowns.

What to Watch

  • The presidential election will dominate the headlines this week, as volatility is likely to remain elevated, particularly if the outcome is contested. Economic data include ISM manufacturing on Monday, durable goods Tuesday, ISM non-manufacturing on Wednesday and the monthly payroll report Friday.

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  • This material is not a recommendation to buy, sell, hold or roll over any asset, adopt an investment strategy, retain a specific investment manager or use a particular account type. It does not take into account the specific investment objectives, tax and financial condition, or particular needs of any specific person. Investors should work with their financial professional to discuss their specific situation.

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