Election and pandemic forecast for November 2020: volatility

 

The U.S. stock market faced its second consecutive monthly decline in October, with the S&P 500 falling by 3.5% and concluding the month with its worst week since March. The red-hot rally that followed the bear market earlier in the year has faded, and professional investors are cautioning that more turbulence may lie ahead in November. Several factors contribute to the market’s slowdown. The U.S. is experiencing a resurgence of Covid-19 cases, setting new daily records for infections. Additionally, the contentious presidential election, disappointing quarterly earnings from prominent tech companies, and the failure of Congress to pass a second stimulus package before the election have all weighed on investor sentiment.

While November typically experiences average gains of 0.8% in the stock market since 1928, according to Yardeni Research, this year’s November could prove exceptionally turbulent. “November is going to be a tough month volatility-wise,” warns Brad McMillan, chief investment officer at the Commonwealth Financial Network. While there is currently a high level of uncertainty that will impact the market in the short term, McMillan suggests that there are reasons for long-term optimism about stocks.

Here’s what investors should watch in the coming month:

1. Political Risks from the Presidential Election: Election Day on November 3 may not yield immediate results due to the prevalence of mail-in ballots, and the outcome could be delayed by several days. Wall Street is prepared for this uncertainty, as the market has been building insurance against indecision and unrest. However, the election’s impact on the economy and markets may be overstated, as the pandemic continues to exert significant influence.

2. Questions about the True Pace of Economic Growth: While the U.S. economy experienced its fastest-ever expansion of 33% in the third quarter, this followed the worst quarter in history due to the pandemic’s impact. Professional investors are looking for signs that economic growth is improving, including corporate earnings during the earnings season, business confidence as measured by surveys from the Institute for Supply Management (ISM), and job growth.

3. How to Navigate the Market in November: The election and the ongoing pandemic are expected to create short-term market turbulence. Investors should monitor the VIX (Volatility Index) as an indicator of market volatility. Additionally, the Federal Reserve’s quantitative easing (QE) program remains a significant factor. If market conditions deteriorate, the Fed could adjust its stance on QE, which historically has been positive for stocks. Investors are advised to focus on the long-term outlook, as strategists forecast a potential 3.7% increase in the S&P 500 by year-end.

Despite the immediate challenges and uncertainties, some experts believe there may be more upside potential in the market than downside, emphasizing the importance of a long-term perspective.

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