11/02/2020
Election week is finally here, and hopefully we will know the outcome shortly after the polls close on Tuesday. That may not be the case, however. With over 90 million votes having already been cast early, their orderly counting may not be accomplished expeditiously. The possibility of court challenges to the vote count in certain battleground states may delay the final results as well. On the other hand, we should have a clearer picture of the makeup of Congress rather early on election night. 

How markets might react to the election is unclear. If there is ambiguity in the outcome, or if there is social unrest in response to the outcome, expect volatility to remain elevated. Conversely, if there is little or no ambiguity, and the makeup of the next government is decisively clear early on, then markets can react based on the policy implications of the outcome. That itself could result is a near-term rise in volume as portfolios are repositioned, but is not likely to persist. 


Defying history, which suggests that market volatility tends to peak two weeks before an election, the VIX index last week soared above 40 to its highest reading since June, before ending the week at 38, well ahead of the prior week’s close of 28.  No doubt some of that move reflected pre-election anxiety, but more likely it resulted from the surging number of new COVID-19 infections here and in Europe, and the potential for a fourth quarter economic slowdown as a result. A lukewarm reception to tech bellwether earnings added to the risk-off tone and sent the S&P 500® index to a 5.6 percent loss for the week.  For the month of October, the index finished lower by 2.8 percent, the second straight down month following September’s 3.9 percent decline. The S&P 500 now sits 8.7 percent below it September 2 high, and remains 1.0 percent above its recent low on September 23. It also sits just below its 50- and 100-day moving averages, levels below which it fell last week. It remains above its 200-day moving average at 3129, and is technically not oversold, although it is close. 

Crude Oil Falls; Eurozone Stocks Weaker than the U.S. 

In further evidence of economic concern, domestic crude oil fell $4.06 a barrel, or 10 percent last week, to close at $35.79. In early trading this week it is down another $1.00 a barrel to its lowest level since May. As recently as Oct 22 it was trading above $40 a barrel. The dollar was stronger on the week, and bond yields rose slightly. The ten-year note climbed 3 basis points to 0.87 percent, its highest level since June.

Once it became apparent that there would be no stimulus deal before the election, the focus shifted to the chances for a deal in the lame duck session. However, that was all but ruled out by Majority Leader McConnell who said last week that it will be a January issue.

Stocks in the Eurozone were even weaker than in the U.S. The EuroStoxx 50 index was down 7.5 percent in euros, down 9.1 in dollars. The EuroStoxx 50 index is now 13.1 percent below its July recovery high measured in euros. New imposed social mobility restrictions in Germany and France means growth will slow in November. Growth will also slow in the U.K., which has imposed a partial lockdown, as have others, including Spain and Belgium. 

Fourth Quarter Economic Growth Likely to Give Up Some Momentum 

After the record breaking third quarter growth rate, the U.S. economy undoubtedly began the fourth quarter with a degree of momentum. But that momentum may be about to slow. With previously enacted stimulus benefits expiring, and any new stimulus now unlikely before the new year, and with the resurgent virus and Europe imposing new restrictions, the fourth quarter is facing headwinds that a few weeks ago looked less threatening. The Atlanta Fed’s initial GDPNow model forecasts a growth rate of just 2.2 percent. That is below some private forecasts by as much as half. Expect the latter to see some lower revisions in the days ahead. 

This week’s economic calendar is headlined by the October jobs report. The Bloomberg consensus anticipates the creation of 600,000 new non-farm jobs, similar to the pace of last month, with the jobless rate falling slightly to 7.7 percent. The scheduled October ISM PMI reports are expected to show some slight improvement in manufacturing, offset by slight deterioration in service activity. The Fed also meets this week. And although no major policy announcements are expected, the Fed may describe its readiness to support smoothly functioning markets should trading become volatile following the election.

Important Disclosures:
Sources: Factset, Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. 

Some of the opinions, conclusions and forward-looking statements are based on an analysis of information compiled from third-party sources.  This information has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Ameriprise Financial. It is given for informational purposes only and is not a solicitation to buy or sell the securities mentioned. The information is not intended to be used as the sole basis for investment decisions, nor should it be construed as advice designed to meet the specific needs of an individual investor. 

An index is a statistical composite that is not managed. It is not possible to invest directly in an index.

Definitions of other individual indices mentioned in this article are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section, or through your Ameriprise financial advisor.

Past performance is not a guarantee of future results.

The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a widely used measure of market risk. It shows the market's expectation of 30-day volatility. The VIX is constructed using the implied volatilities of a wide range of S&P 500 index options.

The GDPNow forecasting model provides a "nowcast" of the official GDP estimate prior to its release by estimating GDP growth using a methodology similar to the one used by the U.S. Bureau of Economic Analysis. GDPNow is not an official forecast of the Atlanta Fed. It is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model.

ISM Manufacturing Index, which used to be called Purchasing Manager's Index (PMI), measures manufacturing activity based on a monthly survey, conducted by ISM, of purchasing managers at more than 300 manufacturing firms.An index of more than 50 indicates expansion of the manufacturing segment of the economy in comparison with the previous month while a reading of 50 indicates no change and a reading below 50 suggests a contraction of the manufacturing sector.

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