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Are We There Yet?
No, not a trip to the shore, the election. If 2020 was not crazy enough, now we have the President and First Lady in quarantine after testing positive with the coronavirus. How this affects the election is not our concern, but it does add to a backdrop of uncertainty that investors dislike.
According to multiple reports from our research partners, including one from State Street Bank SPDR funds, (equity) implied volatility for November and December is 2.4 times higher this year than any presidential year in recent memory. Most of the angst is not about the outcome but about the uncertainty of the date when the outcome is decided. Investors have seen this before, most notably in 2000 with the Florida “hanging chads” problem. This year, with mail-in ballots projected to be in the tens of millions and several states extending deadlines for ballot counting, this could be a barnburner. Or not.
If today’s selloff in the equity markets was any indication of future events, the actual election night scenarios may be overblown and non-events. There was no panic selling today, only the proverbial “wall of worry” mentality that often pervades Wall Street. The official September jobs report came in with two flavors; fewer than expected jobs created but a lower 7.9% unemployment number. This is another indication that the economy is reopening.
According to the Atlanta Federal Reserve, third quarter 2020 Gross Domestic Product is projected to be up 25%, the fastest rate since World War II. Of course, this follows the pandemic related second quarter that was down as much. Third quarter retail sales and industrial production are also projected to be up 37%.
Housing starts are up at an annual rate of 218%. Personal savings rates are also at an historic high at 14% as stay-at-home consumers are not out traveling and spending.
Pent-up demand should be good for equity markets in 2021, especially if the COVID vaccine trials continue to show promise and can be widely administered by early next year.
As economist Brian Westbury at First Trust Advisors suggests, the new economy is about “chips and trains”; i.e. semiconductors and transportation vs. the old industrial model. We have been aware of the change and have invested accordingly. The typical September swoon in fact occurred as usual, but October looks promising as third quarter earnings season starts in about two weeks. Reported profits are expected to be in line or better than expected. This positive outlook should continue in November once the election results are tabulated. Either way, we will be cautious going into the election for any undo volatility. As you know, we are always on it!