CAMS Weekly View from the Corner – Week ending 10/23/2020
October 26, 2020
Per our subject title you may be thinking “duh” right.
Expanding the obvious (election) we have in total three significant macro uncertainties within the market landscape.
They are Earnings, Stimulus and the Election.
Earnings? Yes earnings – the actual lifeblood (historically speaking) of stock prices. They are the literal essence of what makes a company more valuable and hence increases stock prices as market participants bid up companies who are able to show consistently growing earnings.
Government Stimulus seemingly has replaced the importance of actual earnings as markets have gyrated around in 2020 according to how much if any more Stimulus will be dropped onto society.
This makes sense from the view of market participants because Government Stimulus is no longer just a little here-and-there but rather represents a tidal wave of new money dropped over the whole of society.
Relative to Earnings we are right in the middle of earnings season whereby companies are releasing their quarterly reports to investors informing them of how their businesses performed in the previous ninety days. Historically, earnings season is a big deal for obvious reasons.
The Government Stimulus is not being lost on the Government bond market as that market is going down in price and up in yield.
That is bond market speak for interest rates are rising. The behavior of that market offers participants are not willing to bid on those bonds to the point of holding rates at low levels in light of the much expected Stimulus, i.e. much more debt and printed money to pay for it.
Importantly, those rising rates at this stage are nothing to get lathered up about but the behavior is notable in the sense of this time around, on the Stimulus front, it seems Government bond market participants are taking note.
That walks us to the election which with the uncertainty is playing a role in the holding pattern for markets as well.
As we have offered in recent Weekly Views we continue to observe a structurally healthy market backdrop. This is the stock market speaking via its behavior and overall healthy trading patterns for companies, sub-industries and sectors.
With the above three macro uncertainties, structural healthiness may be baffling as it certainly is to us at times.
Through an interconnection this may make sense though.
The current earnings season is important and yet can be looked through by market participants as a bit irrelevant because they believe there is a massive amount of money that is about to be dropped onto society regardless of election outcomes. Hence, stocks are set for launch points while Government bonds are set for drops regardless of election outcomes near-term.
The longer term view is where the election does have an overriding impact of course as policies are invoked and executed but those do not happen immediately. Depending on the makeup of Congress – post election – nothing may get done. Yes, the ole D.C. gridlock – maybe.
The point is via the market messages of late, coupled with our interconnect offering, be careful if you are 100% confident the markets will do “x” according to certain election results in its immediate aftermath.
The bottom line at this stage is the stock market in particular continues to look quite constructive. This implies but certainly does not guarantee that it wants to go higher near-term.
This is not a prediction but rather a reporting from the entire stock market structure – again from individual company to sub-industry to sector behaviors.
Collective market participants are fully aware of the big three uncertainties above and they have continued to leave in the wake of their market operations a constructive set up.
If you are focused on the long-term via various election results there may be a timeline disconnect between your view and collective market participants view.
Said differently, perhaps, through the lens of the election you are viewing what the next two, four and even beyond years may look like while market participants are more focused on what the next several months will look like. Perhaps.
I wish you well…
Director, Market Research & Portfolio Analysis
Portfolio Manager, CAMS Spectrum Portfolio
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