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Factors That Could Derail Stocks in Q4
Since the height of the pandemic-induced sell-off in mid-March, many U.S. stocks have rebounded and some are even up year to date. But there are questions about whether this rally can be sustained. Several factors loom on the horizon that could complicate the picture going forward.
While the rate of confirmed cases of the new coronavirus nationwide is starting to decline, health experts, including CDC Director Robert Redfield, fear that hospitals could become overwhelmed when flu season arrives later this year.
This puts a premium on finding a vaccine. Armed with billions in government aid, more than 170 pharmaceutical research teams worldwide are working to find one.
Large firms like Moderna (ticker: MRNA), Pfizer (PFE), AstraZeneca (AZN) and Johnson & Johnson (JNJ) are reportedly making progress on a potential COVID-19 vaccine.
The first company to deliver a viable vaccine to the market would get an incredible boost, but the broader economy would be an even bigger beneficiary.
Such a discovery could open doors to a resumption of our prepandemic lives, which would help businesses across the country get back on their feet.
That said, we are likely months away from a vaccine becoming available to the public, according to most experts. And even then, initially it will likely only be accessible to those who are most at risk.
Prolonged Recession
If consumers feel unsafe, they are less likely to venture out of their homes and resume their daily routines, even if businesses are open. That contributes to a vicious cycle of less spending and high levels of unemployment.
Some pain on the macro level has been mitigated by policy and lawmakers injecting trillions of dollars into the system in recent months. But the longer businesses remain shuttered and millions of people remain unemployed, the worse the cycle will get.
At some point, even the resiliency of the stock market will be tested if the unemployment rate stays elevated and earnings begin to suffer. That’s even as ultra-low interest rates have sparked a housing boom in recent months and left investors with limited options in which to park their money.
Before Thursday’s market sell-off, the S&P 500 Tech Information Index was up nearly 40% for the year. While some pockets within tech have valuations that are hard to justify, many others will continue to thrive, including the likes of Amazon (AMZN), Microsoft (MSFT) and Google (GOOGL), which have been immune to many of the pandemic-related challenges.
Other industries reliant on face-to-face personal interactions, such as airlines, hotels, restaurants and movie theaters, would continue to suffer. Therefore, we could see many investors re-balance portfolios that have been become overloaded with equities to include more cash and bonds and other fixed-income holdings to guard against future volatility.
U.S.-China Relations
Citing national security concerns, President Donald Trump last month took action against China-based firms Huawei and TikTok to limit their operations in the U.S. This came after years of contentious trade negotiations and increased tensions over China’s handling of the initial stages of what has unfolded into a global pandemic.
The culmination of these spats has led many to speculate about the possibility of a Cold War breaking out between the two economic superpowers.
Could that happen? Perhaps. Will it? Probably not.
At the same time, each conflict increases the chance that more manufacturing could return to the U.S.
Trump already stated that he would offer tax credits to firms that operate in the U.S. and has threatened to pull government contracts from domestic companies that continue to outsource business to China.
While that could lead to higher inflation levels due to goods being more expensive, it may also result in a greater number of U.S.-based job opportunities.
Democrats Taking Office
At the beginning of the year, Trump presided over a strong economy and seemed like a small favorite to win reelection against whatever Democratic challenger emerged from the primary. The pandemic changed that.
Whether Trump can convince voters that he can get things back on track remains an open question. Suppose the House of Representatives remains under Democratic control if Joe Biden wins the White House and the Republicans lose the Senate; that’s when things could get interesting.
We’d almost assuredly see higher taxes on corporations and wealthy individuals, along with an Obama-era approach to regulating banks and fossil fuel producers – all of which could have ramifications for broad segments of the market.
What could happen beyond that is less certain, but it would seem likely that an expansion of the Affordable Care Act, “Medicare for All” and an infrastructure spending bill would all be on the table.
Anything short of the Democrats gaining control of the entire federal government would produce far fewer meaningful policy shifts. In today’s hyperpartisan environment, it’s doubtful the parties will come together to pass new tax and health care legislation.
With the election only two months away, investors will soon have greater clarity into what policies might be enacted and how to adjust their portfolios accordingly.
The bright side to these potential market disruptions is that investors can hedge, diversify or seek to profit from the other side of these trades. There’s also no shame in reallocating into safer assets for a while, in hopes that 2021 brings greater clarity.
