Last week stocks had one of their worst weeks since the COVID meltdown in March, with the S&P 500 (SPY) falling 4.65% and the tech heavy NASDAQ 100 (QQQ) falling 4.85%.
It looks like two factors hit stock.
US presidential election on Tuesday: The US presidential election is on Tuesday, only a few days away. I don’t think the stock market is overly concerned about who wins. The stock market and economy did well under Trump and Wall Street thinks stocks and the economy can do well under Biden. The risk here is a contested election and the potential for social unrest that weighs on consumer spending and economic growth. Overall I am expecting some minor volatility on the election but I don’t see this as a big risk event for stocks.
New COVID lock downs in US and Europe: The bigger reason stocks fell is because of renewed worries over COVID, with both the U.S. and Europe recently implementing new lock downs.
For example, in Illinois, indoor dining has been banned again.
Restaurants close indoor dining across state due to Illinois COVID-19 restrictions; many worry how they can stay open
Here’s some coverage on what’s happening in Europe.
As you can see, lock downs are happening again in a big way all across the world, and that is bad for the economy and the stock market. I consider COVID to be a much bigger threat to stocks than the US election.
What Should We Expect Moving Forward?
Despite these risks, I am not expecting a stock market meltdown. In fact I remain optimistic.
In the short run I am expecting more volatility. Beyond some minor volatility I am expecting stocks to stabilize and grind higher, very slowly, into the end of the year. Here’s why.
COVID threat has diminished: COVID is a terrible human tragedy and every life that is lost is a significant. But as it relates to the economy and stock market, we know a lot more about the virus now than we did when it first hit in March and the world is more prepared to manage the situation. That alone will help mitigate the impact COVID on the economy and the stock market.
Stocks best six months of the year are here: The stock market is moving into the time period that is historically the best six months of the annual cycle. Stocks have a history of delivering great returns from November through April. Take a look at the chart below from Investopedia.
Santa Claus rally on the horizon: U.S. also have a strong history of delivering solid returns in December, frequently refered to as the Santa Claus rally. Here are some more details from Investopedia.
A Santa Claus rally describes a sustained increase in the stock market that occur in the last week of December through the first two trading days in January. There are numerous explanations for the causes of a Santa Claus rally including tax considerations, a general feeling of optimism and happiness on Wall Street and the investing of holiday bonuses. Another theory is that some very large institutional investors, a number of whom are more sophisticated and pessimistic, tend to go on vacation at this time leaving the market to retail investors, who tend to be more bullish.
Here is the Plan
For younger investors or investors with a longer time horizon, weakness in stocks creates an opportunity to buy low. My plan is to be aggressive and buy stocks when they are down and look for a strong close to the year.
Disclaimer: This report is for entertainment purposes only. Every investor should consult with an investment advisor before making investment decisions. The Vodicka Group, Inc. is not a broker/dealer. We do not receive compensation for mentioning stocks. At various times, the clients, publishers and employees of Vodicka Group, Inc., may buy or sell the securities discussed for purposes of investment or trading.