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U.S. Stock Market Prepares for Turbulent Week as Election Day Approaches

October 27, 2020

Stock Market

Stock markets are looking as vulnerable as ever, with mounting concerns over the outcome of the November 3rd election adding to fears of the ongoing coronavirus pandemic and fiscal stimulus uncertainty.

The CBOE Volatility Index (VIX), shot up to 32.46, its highest closing level since September 3rd. At the same time, the S&P 500 had its biggest one-day drop, suggesting investors are reluctant to buy stocks ahead of voting.

“What we’re seeing today is people setting up for Election Night: raising cash to preserve capital, lock in capital gains at a lower rate, and to have some cash available for the growing eventuality of lower prices,” said Robert Phipps, director at Per Stirling Capital Management in Austin, Texas.

Investors have been betting on a win by Democratic challenger Joe Biden by buying alternative energy shares and cannabis stocks, which are expected to benefit from his policy proposals. Bond yields have climbed, partly in anticipation of greater stimulus under a Biden administration.

Now market watchers are increasingly concerned that an unexpected victory by President Donald Trump, a Republican, or an uncertain election outcome could force market movement similar to what occurred in 2016 when investors were overwhelmingly positioned for a Hillary Clinton presidency.

Biden still leads in national opinion polls by 7.9 percentage points, though Trump has increased his standing in “battleground states” Georgia and Michigan.

A surprise victory by Trump could lead to a post-election jump similar to that in 2016 when a rally in pharmaceutical and financial companies helped reverse overnight losses and pushed the S&P 500 up by more than 1%, the beginning of a surge which extended through to the end of the year.

JP Morgan analysts said on Monday that the best outcome for equities is an “orderly” Trump victory, with the S&P 500 potentially reaching $3,900. A divided government could be a net positive, they said, while a Democratic White House and Congress would be neutral with the potential for a larger stimulus weighed against higher corporate taxes.

Signs of a close election tend to lead to more volatility in the run-up to Election Day, said King Lip, chief strategist at Baker Avenue Asset Management in San Francisco. “The polls appear to be narrowing…and what that causes is just more uncertainty,” he said.

Overall, the S&P 500 is up by approximately 5% for the year to date and remains about 5% below its record high posted in early September. Since then, a widely expected fiscal stimulus bill in Washington has stalled and the U.S. has posted its highest-ever numbers of new coronavirus cases.

The deep drops in the stock market on Monday has “to do with the lack of a stimulus package and concerns about the pending election,” said Tim Ghriskey, chief investment strategist at Inverness Counsel in New York. “There’s nervousness on both those issues.”

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