When the music stops
What you need to know this week in 3:57 minutes - Nov 3, 2020
“This ain’t democracy, this is crazy, the way we act
When we confuse the markets, with politics when the music stops”
- Eminem’s financial advisor...probably?
It’s been Halloween all year for Mr. Market who’s been haunted by uncertainty since the Pandemic started. With looming questions over the handling of rising COVID cases, a potential second lockdown, a stimulus package, and a Presidential election, Mr. Market is getting volatile and nauseous. After the election this week the country will have an idea of what direction we’re heading in, and the market can re-adjust. Albeit, expect some short-term volatility caused by political news and uncertainty.
The Presidential race comes to an end
The Fed meets to discuss next steps for monetary policy
Europe heads into a second lockdown
What's going on?
It’s about to go down: Trump vs. Biden 2020
It’s election week and on top of the existential dread we may all be facing about the future of our country, many are also wondering what the market will do. The election is undoubtedly highly correlated to the direction of the US’s agenda for the next quadrennial. A lot is up in the air, will we get answers on the Covid response plan or more of the same contradicting statements from White House officials? When will there be a stimulus package? What will it entail? What is the likelihood of future legislation being directed towards further taxation or industry regulation, as well as changes to international trade?
The Federal Reserve Reunites
Hold on to your seats because this week’s market rollercoaster doesn’t end with the election on Tuesday. The Federal Open Market Committee (FOMC) meets regularly every six weeks to review the economy’s health and set the direction for monetary policy with the aim of maximizing employment and stabilizing prices. On Wednesday, the committee will begin its 2-day bender which will end with a policy statement and press conference held by the Chair of the Federal Reserve, Jerome (Jay) Powell. As the pandemic hit the US in March earlier this year, the Fed made several decisions to promote the stability of the financial system (e.g., lowering interest rates to near zero, and supporting the flow of credit to households and businesses).
Hold the door! For Another Stimulus!
Europe is heading into a second-lockdown as the three biggest European economies, England, France, and Germany, enforce nationwide lockdowns due to rising COVID cases. Europe’s economic recovery is underway but it’s losing momentum faster than expected as the region battles the pandemic. To provide some firepower for the Eurozone to fight back and not lose ground, the European Central Bank (ECB) hinted at an additional stimulus package.
But what does it all mean?
It’s always darkest before dawn, and the same goes for the Presidential election as far as the market is concerned. The good news is that any result is better than the current quasi-Schrodinger-esque state of affairs of uncertain chaotic energy. The bad news is that it’s time to strap in, the boat is going to rock. Candidates and newscasters will be the center of attention this week creating static and noise that will ultimately hit the markets. With the economic recovery hinting at a slow down and a potential second wave of COVID cases that may lead to a potential lockdown, the market will benefit from a new stimulus package. The sooner a leader is decided, the sooner a stimulus package can make its way to the people.
When it comes to the Fed, no news is good news. The Fed is focused on supporting the economic recovery in the face of rising COVID cases across the country. It’s unlikely that the FOMC will change interest rates (near zero) and it’s quite possible that Powell will call on Congress to pass a stimulus package to aid the Fed’s strategy on monetary policy to sustain economic recovery. Furthermore, should European nations pursue further lockdowns, the US economy may be whiplashed by slowing economic partners. The ECB will potentially aid its sphere of influence to avoid further economic deterioration, which will aid the Fed’s decision-making in preparing for a new global COVID wave.
What’s an investor to do?
All this noise and further uncertainty give Mr. Market a headache - expect volatility in the short-term. The biggest question is one of direction. Regardless of the outcome, Congress is expected to pass a stimulus package shortly, and the market will finally be able to adjust its expectations for the next four years.
Fortunately, there has been a plethora of economic data released last week (see An uncertain market looks for certainty) and more to come this week that provides guidance on the actual strength of the economy (e.g., Markit manufacturing PMI and ISM Manufacturing Index, ADP employment report, and earnings from 133 S&P 500 companies, including Alibaba, Uber, Square, and Paypal). Focus on economic data and earnings performances. The short-term volatility will subside and fundamental value will shine once more.
What we’re reading:
Life on Mars by Tracy K. Smith
Death At Intervals by José de Saramago
Some good news everyone!
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