The market is once again in a confirmed uptrend, but the stock market forecast is anything but clear.
Investors riding the historic stock market rally from the coronavirus crash bottom on March 23 to record highs in early September pushed a few concerns to the background. The unraveling U.S.-China trade detente. Looming antitrust action against FANG stock stalwarts Alphabet (GOOGL) and Facebook (FB). A possible fall coronavirus wave. A lapse in fiscal stimulus. A potential Democratic sweep in Election 2020 that promises big tax hikes for corporate profits and investment gains. A drawn-out vote-counting process that jolts stocks like the 2000 hanging-chad election.
Now, all those worries may come to the fore in a matter of weeks. Expect more stock market turbulence.
“Uncertainty has rarely been higher for financial markets,” Morgan Stanley chief U.S. equity strategist Michael Wilson wrote this week. He sees the S&P 500 and Nasdaq 100 at risk of falling to their 200-day moving averages before the next stage of the bull market resumes.
Hopeful Signs In Stock Market Forecast
Yet the stock market outlook isn’t all grim. Three big stabilizing forces should prevent a prolonged slump. Steadying confidence that a coronavirus vaccine is within reach. A government spending tailwind — once fiscal policy gets through a preelection air pocket. And stepped-up Federal Reserve asset purchases, especially with policymakers committed to stimulate above-2% inflation for an extended period.
Michael Arone, chief investment strategist at State Street Global Advisors, anticipates volatility until the 2020 election winner is clear. But going forward, he has a sunnier stock market forecast.
“Once we get resolution, the outlook for stocks will remain positive,” he told IBD. “You still have negative real interest rates. That’s going to support asset prices and valuations. And we are going to get another massive fiscal policy package under either candidate.”
Those factors help explain why Ed Yardeni, chief investment strategist at Yardeni Research, is keeping an upbeat market outlook, regardless of who wins the high-stakes election. His stock market forecast sees the S&P 500 rising to 3500 by year-end and 3800 by the end of 2021.
Stock Market Outlook And Election 2020
A Democratic sweep that ushers in “radical regime change and a shift to the left will have consequences” for stock prices, he told IBD.
Yet “the policies are going to be (highly) stimulative, rather than policies that cause a recession,” Yardeni said.
Meanwhile, revved-up fiscal policy will put the onus on the Federal Reserve to step up its asset purchases to hold down long-term rates, Yardeni says.
“We’ve crossed into the Twilight Zone of Modern Monetary Theory,” which holds that deficits don’t matter — unless and until inflation gets uncomfortably high.
He expects Fed efforts to hold the 10-year Treasury yield at 1% or lower in the near term. The Fed’s suppression of long-term rates will be bullish for the stock market forecast. The policy will make safe Treasury returns pale by comparison and raise the discounted value of long-term earnings growth.
Still, the immediate stock market reaction to a Joe Biden presidency and Democratic Congress might be to sell.
Biden Tax Hikes On Profits, Capital Gains
Joe Biden has proposed hiking the long-term capital gains tax rate to 39.6% from 23.8% for million-dollar earners. Expect a flurry of selling of profitable positions. Tax selling happened before far more modest cap-gains tax hikes took effect in 1987 and 2012.
Overall, Biden’s proposed tax hikes amount to $4 trillion over a decade, according to the Tax Policy Center. The plan includes hiking the statutory corporate tax rate to 28% from 21%; doubling the tax on profits of foreign subsidiaries to 21%; and establishing a 15% corporate minimum tax aimed at companies, like Amazon.com (AMZN), whose tax breaks largely erase tax liability.
Goldman Sachs has estimated that the proposals, if implemented, could knock 12%, or $20 per share, off 2021 S&P 500 earnings. Yet other Biden proposals to increase federal spending would provide somewhat of an offsetting boost.
A Biden presidency might be good news for hospitals and health insurers by broadening Affordable Care Act subsidies and resolving the latest constitutional challenge.
Election 2020 Stock Winners, Losers
Managed care providers and drugmakers could be pressured by Biden’s proposed Medicare public option prescription price cubs. However, expanded insurance coverage and a likely increase in coronavirus testing bodes well for biotech and health care equipment stocks, says State Street’s Arone. He also sees clean energy and infrastructure as winners in a Biden presidency, boosted by more government support.
Notably, hospitals, managed care and solar stocks were key winners on the market’s Sept. 30 follow-through day, just after the first presidential debate.
A Trump victory would give a lift to fossil fuel energy stocks, defense companies and financials.
Hightower Advisors figures the initial difference between a status-quo election and a Democratic sweep would be a range of 5%-10% for the stock market. A Donald Trump reelection would spark a stock market rally of up to 5%, while a Biden victory and Democratic control of Congress could trigger up to a 5% sell-off.
Senate Control Influences Stock Market Forecast
If Biden wins, the stock market will take its cue from the outcome of the Senate battle. Currently, the RealClearPolitics polling average shows Democrats picking up four seats, which would give Biden a 51-49 majority. The most positive stock market outlook scenario might be a net Democratic pickup of two seats. That would still leave Biden one short of a majority needed to push through big tax hikes and progressive reforms. Yet independent-minded Alaska Sen. Lisa Murkowski would probably deprive the GOP of a majority committed to fiscal conservatism.
Biden appears to have a clear edge, though his lead narrowed slightly in the latest IBD/TIPP Poll. If the presidential race tightens considerably, Wall Street will be on guard for a nail-biter finish, with possible recounts and a court fight.
The 2000 postelection legal fight went on for five weeks and saw the S&P 500 fall as much 9.6%. That drop, however, probably overstates the impact on stock market psychology. At the time, Wall Street was in the early stages of the 2000-2002 bear market after the dot-com bubble.
Election 2020 Disputes
In 2020, though, a legal fight over a disputed Trump vs. Biden election might boil over from the courtroom into the streets. Tensions already are running high over mail-in voting, a hasty Supreme Court nomination and police-related deaths of black Americans, exacerbated by Covid-19 and high unemployment.
Even without legal maneuverings, the 2020 election winner may not be clear for days. That’s because many states won’t begin counting an unprecedented number of mail-in votes until Election Day.
Yet there’s still a chance of a quick decision. Florida and North Carolina, two Trump states in 2016, will both get a jump on mail-in ballots well ahead of Nov. 3. If Biden holds a clear lead in either state after election night, it would likely be game over for Trump.
Whatever the final verdict, it should set the stage for the next leg of the bull market. Yet the gauntlet of world-changing and economy-shaping developments between now and then may lead to a stock-market advance that is less rapid and more volatile than in the recent coronavirus rally.
Stock Market Forecast In Post-Coronavirus World
Vladimir Putin’s Aug. 11 announcement that Russia approved a coronavirus vaccine was pilloried by the scientific community. Yet Wall Street may have offered a preview of how the stock market may react to a credible breakthrough. The Nasdaq’s 1.8% slide led the market lower as the S&P 500 pulled back a more moderate 0.8%. The take-away: A return to normalcy may not be great news for tech stocks.
The tech sector, utilities and health care were the only industries to see positive earnings growth in Q2, as overall S&P 500 earnings dived 32%, wrote LPL Financial chief equity strategist Jeffrey Buchbinder.
“In a year, we may not be setting up as many home offices or buying so many devices for kids to learn remotely,” Buchbinder wrote. “If this causes earnings momentum in the sector to fade, technology stocks could be used as a source of funds to move into cyclical value stocks that have lagged.”
“Prepare to pivot from the ‘Pandemic trade’ to the ‘Reopening trade,’ ” BCA Research advised clients in a Sept. 29 strategy outlook. “Vaccine optimism should pave the way for cyclicals to outperform defensives, international stocks to outperform their U.S. peers, and for value to outperform growth.”
The next big date for Covid vaccine progress is expected in late October, when Pfizer (PFE) says it will have results for its pivotal Phase III trial. Moderna (MRNA) data is expected in November. AstraZeneca (AZN) and Johnson & Johnson (JNJ) coronavirus vaccine data could soon follow.
Will all that news set up tech stocks for further selling? Possibly, but the recent Nasdaq correction already has reversed some excess bullishness. Buchbinder wrote on Sept. 28 that he saw the 13% pullback as a buying opportunity for long-term growth tied to cloud computing and e-commerce. Meanwhile, the mid-October release of the iPhone 12, the first Apple (AAPL) 5G iPhone, and the Q3 tech earnings parade may serve as catalysts for a tech-stock rally.
Antitrust Action Vs. Facebook, Google
Yet other trouble spots are on the radar. The coming days and weeks could see the federal government file antitrust lawsuits against FANG stocks Google and Facebook. The Justice Department is reportedly close to suing Google for anticompetitive behavior tied to its dominant search position. The Federal Trade Commission is reportedly preparing an antitrust suit against Facebook, with a decision expected by year-end.
Such cases take years to play out, so the mere threat of antitrust action may not derail these Big Tech stocks. Yet there could be nearer-term consequences. For example, the FTC could simultaneously seek an injunction to block the strategic integration of Facebook with Instagram and WhatsApp.
U.S.-China Cold War
The re-escalation of U.S.-China economic tensions is another wild card. Until now, the growing conflict over trade and technology has always seemed to stop just short of a red line that imperils U.S. multinationals in the world’s second-largest economy. Yet the crossfire is growing more dangerous. Recently, Beijing made official its long-threatened “unreliable entity list,” targeting companies whose compliance with U.S. trade restrictions harms Chinese businesses.
China has yet to reveal the firms that will be placed on its naughty list or the consequences they’ll face. Yet Beijing may be getting closer to pulling the trigger as President Trump takes aim at TikTok, WeChat and other Chinese businesses. It’s not yet clear whether the Trump administration’s new step restricting technology exports to SMIC, China’s biggest chipmaker, will lead Beijing to cross that red line.
U.S.-China relations would likely be rocky under a second Trump term. But Biden also has taken a fairly hard line vs. Beijing during the 2020 election cycle.
The 21st century superpowers have been moving toward a new technology cold war for some time. A major economic decoupling would have massive ramifications for global supply chains and economic growth. That could have an outsized impact on the broad stock market and tech giants in particular.
Wall Street and Silicon Valley are far more exposed to international trade and China than the U.S. economy. But any such decoupling would likely happen over years.
Coronavirus Cases Vs. Vaccine
A fall coronavirus wave that coincides with flu season is yet another potential pitfall. So far, national U.S. trends look decent. The daily average Covid-19 tally of 41,400 cases over the week through Tuesday topped the prior week’s average by 3%, less than the 9% increase in daily tests.
While the number of hospitalized Covid patients has stopped falling, it’s still down by well more than half since late July. Yet North Dakota, South Dakota, Wisconsin and some neighboring states are seeing a surge in cases. Many of those states have relatively small populations, but the danger zone could be spreading.
If Congress fails to renew fiscal stimulus before lawmakers head home for campaign season, a fall coronavirus wave could further dampen growth. Still, Covid-19 vaccine optimism should limit any stock market fallout from a broad worsening of the pandemic.
Stock Market Forecast Includes Proactive Fed
The Federal Reserve’s Nov. 4-5 meeting — right after Election Day — could provide more downside protection for the stock market outlook. Softer data could prompt the Fed to step up asset purchases or at least take a half-step, shifting those purchases to the long end of the Treasury yield curve.
The 2020 election outcome — or perhaps even a tense nonresolution — might help dictate Fed policy moves. Goldman Sachs expects that a Democratic sweep would send the 10-year Treasury yield surging by 30-40 basis points, “largely reflecting the possibility of substantially higher spending.”
If a new fiscal push coincides with positive coronavirus vaccine news, the 10-year Treasury yield could vault well past the 0.50%-0.96% range that has prevailed since March 23. Such a rise, coming as Wall Street comes to terms with a likelihood of significantly higher taxes and heavier-handed regulation, could knock stocks for a loop.
The Fed probably won’t tolerate a big rise in the 10-year Treasury yield, pushing up rates on 30-year mortgages and auto loans. Taking policymakers’ foot off the gas at a time of 8%-plus unemployment would cast doubt on their new commitment to boost inflation to around 2.5% in coming years. Yet Wall Street can only guess if, when, where and how the Fed will draw the line.
State Street’s Arone says “an awful lot would have to go right” before the Fed has to worry about capping long-term Treasurys. Fed officials have shown little enthusiasm for expanding on their hefty $120 billion in monthly asset purchases, he notes.
Fed Policy Raises Long-Term Question
If Fed policy is to match the Fed’s new rhetoric, it will likely mean a cap on long-term Treasury yields, greater purchases of long-term government bonds, or a combination of the two. When those answers come — likely by the year’s final policy statement on Dec. 16, if not in the immediate postelection meeting — their impact on financial markets could be dramatic.
All that monetary fuel, and the likely fiscal expansion after elections, should sink the U.S. dollar, boost the price of gold, silver and copper and power the stock market beyond fall turbulence. How will the Fed eventually wean the economy off ultralow interest rates when the federal government is expected to produce $2 trillion deficits as far as the eye can see? That will wait for another day.
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