Market braces for possible turbulence in November as election looms
“Risk-off” could return to popularity if results aren’t quick, underpinning bonds, VIX, gold
Other November events include Fed meeting, retail earnings, possible vaccine data
We’re calling this article, “November Outlook.” Maybe a better name is “Nov. 3 Outlook,” because it’s kind of hard to look past that date.
Next Tuesday’s election determines far more than who gets the White House key on Jan. 20. From a market perspective, it also could help shape the scenario for taxes and regulation, infrastructure spending, and fiscal stimulus over the next two to four years. All of these have definite economic and market implications, and we won’t necessarily know the answers right away.
This year’s election could create even more market turbulence than usual thanks to possible COVID-19-related slowdowns in the vote counting. The market hates uncertainty. If we wake up Nov. 4 and don’t have a clear winner (a possibility, according to experts), the following days and weeks could be particularly rough.
Back in 2000, when the battle between Al Gore and George W. Bush took more than four weeks to be decided after voting day, the S&P 500 Index (SPX) fell 5% between election day and the final results. No one knows exactly how things might play out this year, but generally, political analysts say the closer the national race is, the more likely we won’t know the winner immediately.
This isn’t a political column and we’re not going to make any predictions. Leave that to the Washington pundits. As of late October, pollsters said the race looks like it may be favoring Democrats, but we all know how the polls don’t always get it right.
Between now and Nov. 3, investors are probably going to stand more on the sidelines, perhaps taking some profits after the long rally. You could even see signs of that in the final weeks of October as some of the most successful stocks of 2020, including Info Tech and home builders, took some punishment from investors.
Volatility Watch: Calm Sailing, But What if Vote Results Get Delayed?
While October seems to be ending on a less than stellar note, volatility wasn’t off the charts, as some analysts had feared going in. The Cboe Volatility Index (VIX), often known as the market’s “fear gauge,” spent most of the month stuck in the mud between 25–30 before edging up in the final week of October as virus concerns hit the market. Those are historically high levels, but kind of meek compared to above 80 in March when the pandemic struck.
If the election is settled smoothly, we’ll still have the pandemic to deal with and worries about a new wave causing shutdowns across the U.S. and Europe. So it’s hard to see VIX settling back to normal levels of 20 or below anytime soon.
Assuming something similar to 2000 happens, we have some other examples of recent geopolitical-related market volatility to study. For instance, after the surprising approval of Brexit in 2016, VIX topped out at just above 25, which is actually lower than it is now. In March 2020 when the pandemic first shocked markets, VIX climbed above 80. See the chart below for a few of the volatility high points from the past six years.
FIGURE 1: A 6-YEAR VOLANTHOLOGY. Though the Cboe Volatility Index (VIX – candlestick) ticked above the 30 mark in late October, it’s well below the 80 levels seen at the height of the COVID-19 scare earlier in the year. VIX rose above 40 (blue line) on two other occasions since 2015—once during an emerging market scare originating in China, and again in 2018 when the markets began to get concerned about rising interest rates. That 2018 rise was so abrupt it came to be known as “Volmageddon.” Data source: Cboe Global Markets. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Mark Your Calendar
Here are a few data and events to watch for in November.
|Nov. 1||ISM Manufacturing|
|Nov. 6||U.S. Jobs Report|
|Nov. 13||Consumer Price Index|
|Nov. 12||Producer Price Index|
|Nov. 13||Michigan Sentiment- Prelim|
|Nov. 17||Retail Sales|
|Nov. 18||Housing Starts|
|Nov. 19||Existing Home Sales|
|Nov. 24||Consumer Confidence|
|Nov. 25||Durable Goods|
|Nov. 25||New Home Sales|
|Nov. 25||Michigan Sentiment – Final|
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That said, VIX futures for November and beyond fell substantially through the course of October, suggesting to some that investors are less worried about a drawn-out post-election fight over results. Whatever the case, a rise in VIX often signals a rise in choppiness and the chance of a pullback. Plan accordingly.
How should people consider preparing in case of a 2000 repeat? In volatile times, “risk-off” types of investments like the Utilities, Staples, and Real Estate sectors traditionally do better, though there’s obviously no such thing as an investment without risk and the market is never really predictable. The type of stocks most exposed to geopolitical winds tend to do worse when volatility ticks up. These can include Industrials, Materials, Info Tech, and Financials. There were signs of a move into “risk-off” in late October as the market sagged.
Volatility often sends some investors out of stocks and into places where they perceive less risk, including fixed income, gold, the U.S. dollar, the Japanese yen, and cash. That didn’t seem to be happening until October’s final week. Going into late October, the 10-year U.S. Treasury yield climbed above 0.8% for the first time since June.
Remember, yields climb as the underlying Treasury falls, so this means fixed income appeared a bit less popular than it did going into October. The dollar, another so-called “safe-haven,” fell toward two-year lows. Gold continued chopping around and wasn’t anywhere near its all-time high posted last summer.
If there’s chaos after the vote, it wouldn’t be surprising to see investors pile back into the “horsemen of risk,” including VIX, fixed income, and gold. Remember the crazy ups and downs in stock futures on election night 2016? As an investor, you’ll probably want to have one eye on the election returns and another on the markets next Tuesday night, and remember, there’s no need to necessarily jump right in. Sometimes it’s better to let things settle a bit and know the facts before getting your feet wet.
If you like to trade aggressively as news happens and feel tempted to have a go next Tuesday night or Wednesday, consider keeping your trade sizes smaller than normal and consider what you might do outside of stocks to hedge a stock market position that goes against you. Gold and volatility hedges sometimes gain in popularity around an election. So do options strategies.
Infrastructure Hopes, Tax Worries Could Depend on Election Results
Whoever wins on Nov. 3 (or whenever the winner is ultimately determined), it’s not like they can necessarily do anything big right away that would have an immediate impact in November. This is especially true if Democrats triumph. They might raise hopes of stimulus and maybe an infrastructure plan (something former Vice President Joe Biden alluded to in last week’s final debate), but they won’t take power until January.
Having said that, remember that the market is a forward-looking animal. Back in May and June as stocks recovered dramatically from the short-lived bear market, a lot of people wondered how equities could be doing so well amid so much economic devastation. A possible answer was, investors invest for the future, not the present, and future hopes remained optimistic.
The same may be true now even as caseloads rise in what experts say appears to be a “third wave” of the virus in the U.S. and Europe. People look out ahead and try to picture what the economy will be like in months or years. That’s one big reason valuations remain so high (low interest rates are another).
Going into Nov. 3, several sectors stand out as more likely to feel impact from the election. These include Financials, Health Care, and Energy. All of these are often seen as more exposed to possible tax and regulatory changes in a changing political atmosphere. For instance, there’s widespread market belief that a “blue” Senate and White House would tighten pressure on drug company pricing, keep banks under a microscope and perhaps limit hydraulic fracking and add more environmental laws. From that sense, the historic belief is that Republican control favors those sectors and vice versa.
Materials are another sector to keep an eye on, particularly if Democrats take control and appear to be on a path toward some sort of major infrastructure spend. Watch banks, too, which would presumably get a tailwind from any sign of rising interest rates on thoughts of more government spending. The dollar could continue to decline if that raises questions about possible inflation, and a weaker dollar tends to be helpful for multinational companies that have half or more of their revenue coming from overseas.
Infrastructure, education, and companies like solar energy firms are historically seen as benefiting from Democratic control, but again, you could probably find examples where that didn’t happen. And interestingly, even though a lot of people think Democrats typically come down harder on corporations, it’s the Trump administration’s Department of Justice that just sued Alphabet (GOOGL) for supposed monopoly practices on search services and advertising. Trump has also been an advocate of controlling drug prices. So you just never know.
Analysts in the financial media seem to have two views about what would happen to the economy in the event of a Trump or Biden win. Some say Democratic plans for higher taxes and more government action (particularly in the fossil fuels industry) could weigh, but that the party’s plans for stimulus and infrastructure might balance things out. Pundits also said the market seems mostly comfortable with Trump’s economic policies, and that a Republican victory might underpin stocks. They add, however, that the administration’s trade war with China and other countries has been a problem for the market at times and would probably ease if Trump lost.
Longer term, a Biden win potentially raises another important question directly in regards to the stock market. He proposes raising the corporate tax rate to 28% from 21%. Higher taxes on corporations could eat into earnings per share, meaning possible pressure on the market. However, that’s a question for well beyond November, and this isn’t a column about 2021 or 2022.
November’s “Also Rans” File
We’ve spent a lot of time talking about Nov. 3 and its possible consequences. While it’s definitely sucking all the oxygen out of the room for now, it’s not the only thing happening next month.
Perhaps tops on the November “non-election list” is retail sector earnings as the holidays approach. Most of retail’s heaviest hitters are expected to report in November, including Walmart (WMT), Target (TGT), Lowe’s (LOW), and Home Depot (HD). Investors should consider listening closely to executives on these calls to get their sense of not just Q3 results, but how the holiday season is shaping up in this unprecedented year. If people start worrying about weaker than normal holiday sales revenue, it could start to weigh on the broader market.
A Fed meeting the week of the election seems kind of like an afterthought, though it could be interesting to hear Fed Chairman Jerome Powell’s remarks. A rate hike isn’t likely to be in the cards, because last time out the Fed basically told us it’s going to be years. However, if the 10-year yield manages to build on its late October rally between now and then, Powell could field more questions about possible inflation and what the Fed could do about it without raising rates.
The next November highlight doesn’t really belong in the “also ran” file. November is when investors might get a first look at some major COVID-19 vaccine trial data. Pfizer (PFE) said earlier this month it could file for emergency-use authorization of its COVID-19 vaccine by late November, assuming it receives positive efficacy and safety data from late-stage human trials. It’s likely any data, good or bad, could have a huge impact on the market. We just don’t know exactly when it will come out, so keep your ears open.
Moderna (MRNA) said the federal government could authorize emergency use of the company’s experimental COVID-19 vaccine in December, if the company gets positive interim results in November from a large clinical trial. If sufficient interim results from the study take longer to get, government authorization of the vaccine may not occur until early next year, the company told The Wall Street Journal.
After all the excitement, this is one November when people are likely to be more ready than usual for that Thanksgiving meal. Even if it’s eaten while “social distancing.”