Jonathan Marriott, Chief Investment Officer
This week we saw the biggest single day fall in the US equity market since June. The fall was led by the Tech sector and the Nasdaq Index was down nearly 5%. To put this move into perspective, the Nasdaq Index is still up 28% this year and the S&P 500 Index has rallied from the March low by 54%. Following moves of this size, it is not surprising to see sharp corrections from time to time. The COVID-19 pandemic has had a dramatic impact on the global economy, but the fiscal and monetary stimulus has been massive. Companies that can still grow and have strong balance sheets, have performed well while others have suffered long lasting damage. This leads to massive dispersion of returns in geographic, sectoral and even between companies in the same sector. We expect the dispersion of returns will continue. As we move into the final quarter of the year, there are a number of events that culminate around the end of October, which may give added impetus to short-term volatility in markets. As the winter begins, we could see a second wave in the pandemic or a vaccine. Brexit trade negotiations could end with no deal or a new trade deal. The US election could see a change of leadership.
This week, the US Centre for Disease Control and Prevention (CDC) ordered preparations for a vaccine to be distributed in October. It is far from clear if any of the vaccine candidates will be ready by then, but news of progress on this front would be good news. Without a vaccine, epidemiologists warn of a rise in cases as we enter the winter months. Thus, the pandemic may give rise to sharply better or worse news.
On this side of the pond, earlier this week eight logistic industry groups have joined forces and written to the UK Government about concerns that there are significant gaps in preparations. The EU Chief negotiator reiterated that there was no movement on the main sticking points of Fisheries, worker's rights and regulatory alignment. In the eight months since the UK entered the transition period, there appears to have been no movement on either side on these issues. For any new treaty to be ratified, it needs to be concluded by the end of October. The pandemic's impact on the economy has dwarfed that of Brexit, but it remains a big concern for the UK economy. The pound has been stronger against the US dollar and held up against the euro so far. This may say more about weakness in the dollar and ECB actions than a comment on sterling. Should negotiations end without a deal, then we should expect some weakness in sterling.
Joe Biden leads Trump in the polls, but the gap is narrowing. Trump appears to be gaining ground in key states. Trump could still win the Electoral College without winning the popular vote, as he did last time. Biden's proposed tax increases are seen as less business friendly, however, a more stable relationship with China could be good for global trade. The election is likely to see a ferocious and divisive campaign, which may make getting further fiscal packages agreed ahead of the election. Equally, no one wants to take the blame for a lack of action, so in a way it is in both sides interests to get a deal done. The Federal Reserve, by changing the way it targets inflation, has given itself more flexibility to take action but their powers are limited and fiscal action is also needed.
These factors could all come together in the last two weeks of October and the first week of November. Markets will no doubt swing on news reports ahead of the events. As markets absorb the news flow, we should expect sharp move in markets in both directions. In the long term, companies that can grow with strong balance sheets should perform well but will not be immune from the volatility. We continue to favour a selective approach to equity and credit and continue to look through the short-term noise. We will be monitoring developments closely while trying to look through short-term movements.
Return to Insights
This communication is provided for information purposes only. The information presented herein provides a general update on market conditions and is not intended and should not be construed as an offer, invitation, solicitation or recommendation to buy or sell any specific investment or participate in any investment (or other) strategy. The subject of the communication is not a regulated investment. Past performance is not an indication of future performance and the value of investments and the income derived from them may fluctuate and you may not receive back the amount you originally invest. Although this document has been prepared on the basis of information we believe to be reliable, LGT Vestra LLP gives no representation or warranty in relation to the accuracy or completeness of the information presented herein. The information presented herein does not provide sufficient information on which to make an informed investment decision. No liability is accepted whatsoever by LGT Vestra LLP, employees and associated companies for any direct or consequential loss arising from this document.
LGT Vestra LLP is authorised and regulated by the Financial Conduct Authority.