Morgan Stanley
  • Wealth Management
  • Oct 19, 2020

Could U.S. Markets Soon Get Unstuck?

Three key concerns may keep stocks trading in a range for a while yet, giving investors time to reposition for the next phase.

Since returning in mid-August to highs last seen before the pandemic, the S&P 500 benchmark index of the broader U.S. market has bounced between 3100 and a high of 3588 set on Sep 2. 

Uncertainties about the trajectory of the pandemic, the strength of the U.S. economy and the outcome of the November election have all contributed to the relatively wide trading range. Essentially, the market has lurched between bursts of exuberance and bouts of doubt and anxiety. Recently, investors seemed concerned about a possible delay of a final outcome for the presidential election. That scenario has faded, amid widening polling margins.

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Yet, other concerns remain elevated. Below are three main ones:

  • The timing and size of CARES 2.0 fiscal stimulus is a major source of uncertainty, as the Senate focuses instead on a Supreme Court nomination. Current relief bills remain far apart, with versions from the Democratic-controlled House of Representatives proposing nearly $2 trillion in aid, while the Republican White House and Senate versions are closer to $1 trillion.
  • The outcome of key Senate races could determine the size of the next stimulus bill if control of the chamber switches parties. Many Senate races remain close. Even if Democrats manage to gain the majority in the Senate, their margin will likely be slim. However, a “blue wave” result—where the Democratic Party gains control of the White House and both chambers of Congress—could lead to an economic relief package approaching $3 trillion come next year.
  • Signs of another cresting wave of COVID-19 infections could also exacerbate worries. On Oct 15, U.S. daily positive cases numbered more than 62,000, the worst report since July. In Europe, new cases have surged to twice their peak in April. We continue to believe that better treatment regimes, lower mortality rates and more clarity on when vaccines will become widely available will help to limit the economic impact. However, consumer sentiment and the job market could suffer. Already, new weekly U.S. unemployment claims have risen again to around 900,000.  

The current U.S. stock market trading range may be with us for a while, even post-election. But we continue to see data that confirms a V-shaped recovery is underway. U.S. housing markets are robust, and healthy used-car prices suggest pent-up demand for autos. Global trade data, especially coming out of China, continue to show improvement. 

For investors, navigating this environment hasn’t been easy, amid rich company valuations, elevated U.S. equity volatility and limited protection from Treasuries against stock-market downdrafts. Consider adding to undervalued areas, such as small capitalization stocks, and sectors like financials, industrials and international, when swings in markets result in potential buying opportunities. A change of control in Washington could also benefit municipals, clean energy, select health care and consumer discretionary sectors.

This article is based on Lisa Shalett’s Global Investment Committee Weekly report from Oct 19, 2020, “Navigating the “Pause.” Ask your Financial Advisor for a copy or find an advisor. Listen to the audiocast based on this report. 

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