As Covid-19 cases soar and investors fret about the economic recovery being snuffed out, US equities are getting sucked into a gathering sell off. The worry is that the US follows the kind of nationally-mandated lockdowns, or at least severe social distancing rules, now being adopted in Europe. Such moves have, after all, flipped our European colleagues Cedric Gemehl and Nick Andrews into the bearish camp. In the US, we would make the point that other factors are also at work.
- The S&P 500 index began its sell-off on October 13, the first day of the 3Q20 earnings season. This may be mere coincidence but the worsening pandemic will focus minds on whether US firms can meet or beat elevated earnings expectations in the coming year.
- The worsening Covid outbreak, centered in Midwestern states, is raising the chance of Joe Biden winning the presidential race and, crucially, the potential for the Democrats to also win control of the senate.
- Tech stocks look especially vulnerable, with Apple, Microsoft, Alphabet and Facebook all falling by -5% or more yesterday. The sector is subject to valuation jitters but also the threat of more activist anti-trust policy, which could be escalated in the event of a Democratic sweep.
A corollary of a Biden win, which may also be weighing on investor sentiment is that a fiscal deal may not be forthcoming until after the new session of Congress starts in January as Republicans will see little electoral benefit in approving fresh spending (for a neat wrap on all these fears, see Will Denyer’s video interview from late last week, Facing Down US Risks).
Still, it does seem that the biggest factor hitting market sentiment is concern that the US may be forced into growth-destroying lockdown measures of the type being adopted in France, the UK and to a lesser extent, Germany. We remain skeptical that such an outcome is likely, irrespective of which candidate wins on November 3.
A key difference between Europe and the US is that Europe managed to crush the outbreak by the early summer, before seeing a resurgence in the fall. In contrast, the US never brought the virus under control at a national level and has been forced to live with it
