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US Stocks: Don't Stop Believing

9 October 2020

US and European equity futures are rising, although Asian stocks are mixed, as investors hold on to hope that the US economy will see another round of fiscal stimulus sooner rather than later. The White House seems to have made another shift in its negotiating tactics, now reportedly wanting to reach a fiscal stimulus deal with Democrats, despite US President Donald Trump calling off talks as recently on Tuesday.

Investors have clearly been sensitive to the on-again, off-again US fiscal stimulus talks, as US equities appear primarily driven by market expectations surrounding the outcome of these talks. Amidst the drama between the White House and Democrats, which add to the political charades leading up to the November presidential elections, it’s evident that investors are clinging on to any sliver of hope that the world’s largest economy will see additional fiscal aid; it’s now just a matter of timing.

Amidst the political wrangling, the S&P 500 has shown its resilience, having climbed about 6.5 percent since flirting with a technical correction in late September. The US equities benchmark is set to register its second consecutive weekly gain, and is now just some 3.7 percent away from its record high.

Meanwhile, the Nasdaq 100 Index is about seven percent off its own record high, on the cusp of posting its third straight week of gains. The tech-heavy index is chipping away at the 12.78 percent peak-to-trough gap evident during last month’s selloff.

This rebound in US equities, while still relatively nascent, is once again testament to the overall supportive environment for the asset class. The tremendously accommodative monetary policy stances around the world ensures that the downside for equities is limited. Though the September pullback was necessary to remove some of the market froth that had built up since March, it has in turn allowed investors to buy the dip, taking advantage of the opportunities that had manifested in recent weeks.

Still, investors remain wary of the risks that lay ahead. While a Biden win and a “Blue Sweep” would assure a larger fiscal stimulus for the US economy, the risk of a protracted wait for the election’s outcome cannot yet be ruled out completely. Such an outcome could leave investors in limbo, which may trigger a bout of risk aversion in the markets.

Unless the fiscal stimulus deal is agreed to before November 3rd, a delayed result from the polls also in turn starves the world’s largest economy of some much-needed aid. The latest US weekly jobless claims show that the number of Americans who are applying for unemployment benefits remains stubbornly high. Although the number of continuing claims has fallen below the psychologically-important 11 million mark for the first time since the pandemic broke out in the US, it still remains well above pre-pandemic levels that numbered fewer than two million.

An agreement over the next US fiscal stimulus package would certainly justify the recent climb in US equities, while potentially encouraging these indices to restore more of its gains. However, these advances are not yet fully assured, as political risks and a stalling global economic recovery could still drag riskier assets lower.



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