Equity Prices Falter in Advance of the Elections

Key Points

▪ Rising uncertainty surrounding the U.S. elections caused volatility to rise and equity prices to sink.

▪ Economic and earnings data have been improving and point to better results for stocks over the next six to twelve months.

▪ We suggest investors not overreact to any possible elections-related volatility.

Last week saw a clear risk-off trend, as U.S. political uncertainty rose in advance of this week’s elections. Equity prices fell, with the S&P 500 Index declining 1.9% for the week.1 Friday marked the ninth consecutive trading day of losses for stocks.1 This represents the longest streak since 1980, although the total decline has been relatively modest at around 3%.1 In other asset classes, U.S. Treasury yields fell slightly, the U.S. dollar weakened, gold prices rose and oil prices fell sharply.1

Weekly Top Themes

1. The third quarter should mark the end of the long earnings recession. With more than 85% of S&P 500 companies reporting, earnings are up about 3% for the quarter year-over-year.2 This represents the first positive quarter since the first quarter of 2015.2

2. The likelihood is growing for a Fed rate increase in December. Not surprisingly, the Federal Reserve did not increase rates at its November policy meeting. Fed officials hinted that a rate increase next month was probable. As of Friday’s market close, the market-based probability of a December hike was 67%.1

3. The labor market continues to strengthen. The most important economic data point last week was probably the October jobs report. Last month saw 161,000 new jobs created, while the unemployment rate dropped to 4.9%.3

4. The jobs market is tightening, putting upward pressure on wages. In addition to the decent headline numbers, October’s jobs report also showed average hourly earnings accelerated to a 2.8% annual rate.3 This marks the highest level of wage growth since the 2008/2009 financial crisis.3 A tighter labor market is a classic sign of a maturing economic expansion.

5. Overall inflation is starting to tick higher. In addition to wage growth, we have been seeing signs that health care, housing and education costs are also increasing. Inflation may cause a drag on consumer spending and broader economic growth in the months ahead.

Volatility May Persist, but Equities Should Move Higher
With solid economic data and positive corporate earnings trends, it would be natural to assume that stock prices should be advancing. That, of course, hasn’t been the case in recent weeks. The obvious culprit is rising uncertainty surrounding the U.S. elections. As presidential polling has tightened, investors have been faced with the question of whether they should move to the sidelines and await the results before putting cash to work, or maintain their existing positions and hope for the best. From our view, it makes sense to maintain a mildly upbeat stance on risk assets for two reasons.