October 5 2020 Market Update

A Bump in Volatility and Questions Ahead

Despite the selloff, the stock market posted its strongest two-quarter performance since the second and third quarters of 2009.

As we look ahead to the fourth quarter, we believe the recent resurgence of volatility is likely to stay. The markets face several unknowns, namely rising COVID-19 caseloads,^[1] the uncertainty around additional stimulus in Congress, and, of course, the presidential election. In a surprise turn of events, in the early hours of October 2, the White House announced that President Trump has tested positive for COVID-19.^[2]

While the news is changing rapidly, we’re keeping the following trends in mind as we head into the fourth quarter.

Technology sector drives volatility

The volatility we saw in September was driven primarily by technology stocks. These stocks had been a significant driver of the recent rally, and a turn in investor sentiment brought them—and thus the major equity indexes—lower.[3]

As we’ve highlighted in recent months, technology has grown to represent a significant percentage of the S&P 500. This implies that any volatility in the sector will likely have a disproportionate impact on the index as a whole, as we saw last month. We expect that this could continue to play an important role in equity volatility going forward.

Rising Coronavirus Cases

After a period of steady declines, the US started to see a rise in the number of reported coronavirus cases last month. Recent data from Johns Hopkins University shows that cases are increasing in more than half of US states.^[4]

Should this trend continue, it could have implications for the economic recovery, notably in terms of jobs and potential business closures. From our vantage point, market sentiment is also tied, at least to some extent, to COVID-19 caseload maps.

At the same time, developments around vaccine discovery are positive. Several companies have entered the final stage of clinical trials.^[5] While drug discovery and approval are an uncertain process, we may start to see some encouraging news ahead. This could help to buoy market sentiment in the fourth quarter.

Politics May Play a Bigger Role in the Fourth Quarter

The November election is a source of potential volatility. Aside from the more typical pre-election market jitters around who will win, the absence of a clear landslide victory is likely to delay results. This in itself could prompt the “animal spirits” of the markets to come out: as most investors know, markets tend to dislike uncertainty. This could be more pronounced if there are indications of a disorderly or contested process.

Again, the surprise October 2 news that President Trump tested positive for COVID-19 presents another unknown. The result could impact both the last stretch of campaigning and the election itself, though at this writing it is too early to gauge what that impact is likely to be.

With respect to economic stimulus, on October 1 the House of Representatives passed a $2.2 trillion relief package proposed by Democrats, though at this writing it is considered unlikely to pass the Senate.^[6] Again, we believe the forthcoming election puts additional uncertainty on the measure.

Looking Ahead—Together

We begin the fourth quarter with multiple questions. With COVID-19 caseloads, economic policy, and the election, a number of factors are in play that could impact markets.

In the uncertainty ahead, we will be focused on maintaining a calm, prudent approach to both markets and the economy—and we encourage you to do the same.

With that in mind, please continue to join us for our informative webinars and keep an eye out for news and information from our team—and, of course, please reach out if you’d like to chat or if you have any questions or concerns that we can help address.

Most importantly, thank you, as always, for your support and trust in our firm. The first three quarters of 2020 have proven to be turbulent not just for markets but for many of our lives, and it is a privilege to help you navigate this unprecedented time.

JSF Financial