Market Volatility Remains Elevated Ahead of the US Presidential Election
This week, global financial markets have continued to be affected by the ebb and flow of news surrounding the pandemic and related lockdowns, as well as new developments in the negotiations for another US fiscal stimulus package – a theme that has been present in markets for several months now. Covid-19 cases are picking up in Europe and parts of the US as the race for a vaccine continues, meanwhile US House Speaker Nancy Pelosi said she is hopeful for a stimulus agreement by the end of this week. Markets are showing signs of increased volatility, which is intensifying as we approach the US election, a historically volatile event for markets. Despite these short-term headwinds, we remain confident in our diverse and global positioning, with our medium-term outlook remaining unchanged, as governments and central banks remain supportive of risk assets.
Cases Rise as Potential Vaccine’s Progress Through Phase 3
Global coronavirus cases exceeded 40 million this week, with experts warning the true numbers of both cases and deaths are likely much higher than recorded given the deficiencies in testing and potential under-reporting in countries. The worst affected countries are the US, India, and Brazil, with the America’s representing around 47% of global cases. Subsequently, authorities have been reimposing varying forms of lockdown measures in a bid to maintain economic activity whilst also mitigating rising Covid cases. Considering the rising case numbers and the significant upcoming political events, markets are displaying increased volatility levels as short-term uncertainty remains. That being said, this time around is expected to be different to the previous lockdown measures that were first experienced, with more efficient processes in place and greater awareness aiding each nation’s attempts to slow the spread of the virus. Additionally, although they have remained quiet during the phase 3 trials, the front runners developing the vaccines are expected to declare whether they’ve effective from December to Q1 2021. With this just around the corner, investors who are able to look through the temporary volatility in the short term may benefit the most when equity markets are buoyed by positive vaccine announcements.
For more information on the vaccine updates and what this will mean for financial markets, please see the attached Market Update document.
US Stimulus Remains in a Stand-Off
US House Speaker Nancy Pelosi has said she is hopeful that a stimulus agreement will be reached this week – a crucial step toward getting a bill passed before the election on 3rd November. Lawmakers in Washington have been negotiating since August, with Democrats arguing for a bigger package to help manage the economic fallout from coronavirus. Albeit, Senate Majority Leader Mitch McConnell has warned the White House against a bigger Pelosi-led deal before the election. If the remaining differences can be settled, Senate Republicans are likely to remain a key roadblock, as many still oppose a bill of its current scale despite a Trump announcement of his willingness to accept a larger aid bill. The administration’s offer has increased to $1.88 trillion, while Pelosi is pushing for $2.2 trillion, with President Trump’s recent comments indicating he may be willing to move closer to what the Democrats are demanding. Still, talks are far from over, with speculation expected to continue and a potential collapse in negotiations bringing further volatility.
Presidential Election Adds volatility
Alongside the current stimulus debates, the US presidential election is fast approaching, a historically volatile time for global financial markets. The next presidential debate is scheduled for Friday 23rd October, and with Trump’s bout of coronavirus dominating headlines since the last event, this final debate could be the most significant. Ahead of the November 3rd election, markets have been and are expected to become increasingly volatile, in coordination with the history books. Historically, the VIX index, which captures market volatility, is heightened around the election dates. One of the best comparators is the 2008 Presidential election, where markets were already highly volatile with the onset of the financial crisis just 2 months earlier, as they have been with the pandemic this year. In the week prior to the election day, the VIX index was at 66.96, as well as 47.73 on the election day. Currently, the VIX index is at 29.96, which would indicate further volatility is expected over the next month.
After the strong performance by equity markets over the summer months, investors are continuing to bake in expectations for a much slower Q4 GDP growth after the strong rebound experienced in Q3. We have been expecting this, and our existing views have not changed regarding our 2020 outlook. The presidential election will increase volatility as we approach the election date and in the weeks following the election, while momentum in global equities is likely to slow in the absence of a US stimulus package in the short term. The impending second wave of coronavirus cases will add concern to investor minds, however with the current measures to mitigate these globally, alongside expectations for further monetary support before the end of the year, the lagged benefit could materialise towards the end of 2020. Despite these short-term uncertainties, we remain confident in our positioning and our outlook remains unchanged.
Key Events We Are Watching This Week:
- Thursday: US Jobs Data
- Friday: UK Retail Sales for September
- Wednesday: Chinese Economic Confidence
For anyone who wants further data to substantiate the position please review the attached Global Economic Update document.
Model Portfolios & Indices
Global stock markets continued to display high levels of volatility over the week as countries across the world battle with virus challenges, mixed economic data, and uncertain stimulus expectations. The portfolios remained robust over the week compared to the benchmarks, benefitting from a high level of diversification in asset classes and geographies, with key markets gaining on stimulus expectations and economic data releases. Looking ahead, we are optimistic on the medium-term outlook from here, accepting further volatility in the near term, but confident in our positioning, with well diversified portfolios which have been designed to weather these market conditions. Year to date, in comparison to the benchmarks, we have recovered from the March coronavirus decline, and we are in a strong position moving forward.
Past performance cannot be used as a guide to future performance and the value of your investment will fall as well as rise in value. You may not get back all of your investment and the final value of your investment will depend on the performance of your portfolio. The actual performance of an individual client’s portfolio may differ due to different funds being used and being restricted in relation to certain asset allocations. Performance figures quoted include fund manager charges but exclude adviser, discretionary, custodian and switch charges. Unless stated, income is reinvested into the portfolio. The information contained in in this document is for information purposes only. It does not constitute advice or a recommendation or an offer or solicitation for investment.
This Day in History
On this day in 1960, John F Kennedy and Richard Nixon clashed in the last of a series of the first televised presidential debates in US history. Two weeks later Kennedy won the election on a 303 to 219 Electoral College victory and won the national popular vote by 112,827, a margin of just 0.17%, the narrowest in US history.
Have a great week,
Jason & Gina