Coronavirus and election concerns have really spooked the market lately with the S&P 500 down -6% on the week.
There are more than a couple of reasons for this weakness.
- Cases of coronavirus are ramping up and there appears to be little cohesion or plan to tackle the escalating number of cases.
- The US election is on Tuesday and there is a real prospect that we won’t know the winner straight away. There is also the risk of a contested result.
- Because of the political meandering, Republicans and Democrats have failed to agree on another stimulus package.
- Earnings season is underway and a number of major companies have failed to live up to expectations.
These factors (and I should say valuation levels in general) have prompted renowned hedge fund manager David Einhorn to call this market a bubble and to start shorting tech.
This is not the first time Einhorn has called for a bubble. He was early in 2016 and I’m not sure if he has nailed it this time. One thing I do agree on is that it is quite difficult to find good value investments at this moment.
Time To Short Stocks?
Despite this, I find it difficult to short stocks in a meaningful way for a number of reasons.
First, the US election. Once it’s over, and assuming we get a winner, it’s very likely that another stimulus bill will be passed. The most bullish result would be a Biden landslide which would lead to a bigger stimulus package, possibly in the realm of $2.2 trillion.
A clear Trump win would also likely lead to a stimulus being passed. In either case, even if a stimulus bill is not passed, we will likely see continued monetary injections from the Federal Reserve. In other words, government officials are ready to act to support financial markets.
Second, there is every possibility that an effective vaccine will be announced (or leaked) some time within the next few weeks.
Dr. Fauci has said that the results of a vaccine will probably be known by the end of November and with millions of doses already being manufactured we could see a huge boost to pandemic-affected stocks.
Considering China has already started rolling out a vaccine (albeit before the conclusion of stage three trials) I speculate that the chances of the US and Europe developing a safe vaccine are reasonably high.
With vaccine news around the corner and with the probability of big government spending, I see there being a floor to the stock market.
As such, pandemic-boosted stocks like Zoom, Wayfair, Shopify may see some pressure but this weakness will likely be more than offset by recoveries in beaten down names.
(I was looking to short ZM but needed to free up some capital first and may have missed my chance already).
Bumpy Road Ahead?
Of course, there are still some stumbling blocks to be aware of.
If we get a contested election then volatility could ramp up and the stimulus could be delayed. Even if we get a clear winner, stimulus could still get held up for political reasons. If this happens, it could be that a cratering stock market forces politicians to act. Remember there is still the Federal Reserve waiting in the wings to inject more liquidity.
A bigger problem is if vaccine data underwhelms the market. A low efficacy rate or poor safety rating could see a huge hit to confidence and an unwinding of recovery bets. This would be a big deal and lead to a weak ending to the year for the stock market.
There are plenty of risks to go around. A contested election and an unreliable vaccine would be a big problem for forward looking stock markets.
But I prefer to stay optimistic at this point and keep a bullish bias. Longer term, government spending and low interest rates should still provide support to the market and I currently only have one short position.
In many ways, a pandemic is like a war. Both create major instability and require huge government spending which eventually devalues the value of money. If Philip Fisher is right, then there should be no reason to give up on the stock market just yet.
Thank You For Reading
Joe Marwood is an independent trader and the founder of Decoding Markets. He worked as a professional futures trader and has a passion for investing and building mechanical trading strategies. If you are interested in more quantitative trading strategies, investing ideas and tutorials make sure to check out our program Marwood Research.
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