Weekly Wrap by Pythagoras Investing : US market wobbles

Fiscal Stimulus v Monetary Policy

Fiscal policy is how a government adjusts its spending levels and tax rates to monitor and influence a nation’s economy. It is the sister strategy to monetary policy through which a central bank influences a nation’s money supply and interest rates.

Monetary policy – there is nothing really left to be done. Fiscal policy is what is left. What can be afforded and how the money will be repaid is a question for next year.  For now, its all about what is left to spend in the government coffers.

Stocks never go up in a straight line forever

Investors have faced a rising number of global coronavirus cases and uncertainty around new U.S. fiscal stimulus. This week, the U.K. said it would impose stricter measures to curb the coronavirus outbreak.  Trump said the U.S. would not be implementing a second round of lockdowns. The uncertainty in stocks in the US in September is due to:

  • COVID-19 cases remain on the rise globally
  • Tech stocks such as Amazon, Apple, Netflix and Tesla had powerful gains and have come back down. Big Tech is now viewed by some as highly overvalued.
  • No new stimulus plan from a bickering set of US lawmakers, means risk to consumers
  • Political risk ahead of the November presidential election
  • And lastly, the entire market swings on news regarding a COVID-19 vaccine

The Market Really Wants US Fiscal Stimulus

As for US stimulus, lawmakers are still struggling to move forward with a new package. Federal Reserve Chairman Jerome Powell said before Congress on Wednesday that further fiscal stimulus is still needed for the U.S. economic recovery to continue. 

“We’ve come a long way pretty quickly, and that’s great. But there’s a long way to go. So I just would say we need to stay with it, all of us. The recovery will go faster if there’s support coming both from Congress and from the Fed,” Powell said

The election is freaking everyone out. Why?

Concern about Trump winning … and continuing the known. Concerns about Biden winning … seen as worse for 55-60% of listed America. But the big one is the Political Parties holding up legislation for fiscal stimulus plans … which the market is waiting on.  Both parties see less risk with ‘no deal’ than a deal on the other’s terms.

Rotation – Passing the baton

Buying the tech dip didn’t work for the market this week. The S&P 500 and Dow are down 7.5% and 6%, respectively, for the month to date. The Nasdaq has dropped 10% over that time period. Shares of Facebook, Amazon, Apple, Netflix, Alphabet and Microsoft are all down at least 11% in September. The markets fall as the rotation out of tech and into cyclical stocks has picked up speed in September.

Economic concerns, however, have made economically sensitive cyclical stocks look scary too. For now, Wall Street seems content to sell first and ask questions later.

What we are seeing is the tech stocks moving down faster (in terms of index performance) than the cyclicals can rise.  It’s a struggle to keep up and an adjustment phase.

Australia is the hostage!

We haven’t got the tech stock weightings in Australia and our cyclical rotation is underway, but we are getting whacked anyway.  Our banks dominate the Australian index.  Whilst there is a “proposed” relaxing of lending standards and practices mooted by Frydenberg the reality is that with lower lending standards and a difficult environment it usually leads to bad debts in the fullness of time.  And banks are up!

All this selling comes as the market celebrates the six month anniversary of low on March 23.

Even with recent losses, the S&P 500 has gained an amazing 45% since then – the strongest six-month rally since 2009.  Only the ninth time the index has gained 40% or more in a six-month period in 85 years. The good news is that historically the index has risen over the following 12 months in seven of the previous eight occasions—the exception being 1933, when it fell 17% over the year following the big gain!

We expect October to be a strong month, and we remain of the view that the market will end February 2021 just 5% off the highs of 2020.  We are aware it is white knuckle time … hang on!

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