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.

Lisa Shalett Chief Investment Officer, Wealth Management

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. 

Risk Considerations

Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision. 

Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.

Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

Rebalancing does not protect against a loss in declining financial markets.  There may be a potential tax implication with a rebalancing strategy.  Investors should consult with their tax advisor before implementing such a strategy.

Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.  Technology stocks may be especially volatile.

International investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economies.

Investing in foreign emerging markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks.

Investing in commodities entails significant risks. Commodity prices may be affected by a variety of factors at any time, including but not limited to, (i) changes in supply and demand relationships, (ii) governmental programs and policies, (iii) national and international political and economic events, war and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities and related contracts, (vi) pestilence, technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary distortions or other disruptions due to various factors, including lack of liquidity, participation of speculators and government intervention.

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