COVID infections, delayed stimulus lead to stock market volatility

October 30, 2020

As of the end of trading Wednesday, Oct. 28, the S&P 5001, had posted -6% for this week. International stocks, represented by EFA2, also posted -6% for the same period. Bonds, on the other hand, were relatively steady, up 0.3% (as represented by BND3).

Key factors at play in this stock market volatility include:
October COVID spike

  • Increasing COVID infections, with increasing hospitalizations and deaths.
    • Based on data from last week,3 average daily hospitalizations in the U.S. increased almost 8%, and the average daily fatalities increased 10%.
    • In Europe, the count has also increased, averaging a record 150,000 per day.3
  • Reduced hopes of a near-term stimulus package.

Election uncertainty may be playing a part as well, as markets do not care for uncertainty. Note, however, that it is common to see a “relief rally” in stocks after an election, although this will also depend on the composition of Congress. Read more about stock volatility.

While we stand ready to buy, as suitable, on your behalf, stocks have not yet reached what we would consider a bargain price. We are targeting a first buy, as suitable, at levels approximately 8% lower than those of Oct. 28.

Future opportunity

Our outlook over two years continues to be moderately bullish because there is substantial opportunity for a rebound if/as COVID lifts due to a vaccine or herd immunity or a combination. As COVID lifts, we expect many stocks in COVID-impacted industries to see a lift in values.

Recent earnings reports will give you a sense of this opportunity – and the current large divide we are seeing in stock performance. About half of the U.S. companies reporting earnings as of Oct. 23 reported an average 31% earnings growth as compared to this quarter last year – a large positive result. The other half posted earnings of an average -53% for the same period, a large negative result.

That negative result is the two-year opportunity. As COVID lifts, many of these companies are likely to turn around, including increases in stock prices. Note that this is a contrarian view: in the face of uncertainty, it is a natural human reaction to back away. However, in the investment world, contrarian investing can be beneficial.

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