The seasonal trends that characterise the US stock market have been thrown off course this year. Spring saw the fastest market sell-off in history, while summer brought a tech-driven rally that as we enter autumn looks to be tapering off.
A turbulent March saw COVID-19 wipe more than 10% off the S&P 500, Nasdaq and Dow Jones Industrial Average indices before each index recovered so strongly through the summer that in September the first two hit record highs.
Both the S&P 500 and Down Jones declined in the first half by 4% and 9.5%, respectively, but have since risen 9.6% and 8.2% through 9 September. The Nasdaq, meanwhile, was up 12% during the first six months of the year and has climbed a further 10.7% to 9 September.
But with infection rates still soaring stateside and the government treading between rebuilding its economy while also protecting its citizens, predicting the future of America’s markets is arguably harder than it’s ever been.
2020 draws similarities to 2009
Much depends on whether consumer habits forged in lockdown will continue. Tech stocks have largely driven the S&P 500’s climb from its 2,237.4 nadir on 23 March to 3,398.9 on 9 September, particularly by Facebook [FB], Amazon [AMZN], Apple [AAPL], Microsoft [MSFT] and Alphabet [GOOGL].
In fact, the five stocks role in helping the world keep turning was so great in July that according to analysis by David Kostin, a Goldman Sachs analyst, these stocks were up 35% YTD while the S&P’s other 495 stocks were down 5%.
Despite the tech stock’s dominance in the benchmark index, much of the S&P’s performance is mirroring 2009, according to analysts. DataTrek research finds that the 2020 rally in stocks is just two points above the 2009 bounce back. “Don’t overthink it – 2020 is just like 2009,” concluded DataTrek, according to MarketsInsider. “If history repeats itself that would put the S&P at 3,588 on December 31, for an 11.1% price gain on the year.”
“If history repeats itself that would put the S&P at 3,588 on December 31, for an 11.1% price gain on the year” - Warby Parker co-CEO Neil Blumenthal
It’s a similar tale with the Dow Jones, which fell from an all-time-high 29,551 in February to 18,591 on 23 March. The index has almost fully recovered – it hit 29,100 on 2 September. Meanwhile, the Nasdaq’s upward trajectory was only temporarily hit in March as it dropped to 6,860. Since then the index has continued to rally and broke through the 12,000 mark for the first time ever on 2 September.
Unprecedented liquidity boosts recovery
What has fuelled such a remarkable recovery?
Mark Haefele, chief investment officer at UBS Global, believes Wall Street’s impressive turnaround is “being driven primarily by central bank policies of adding unprecedented liquidity to markets through renewed quantitative easing and ultra-low rates”, according to Trade Concepts.
There is also rising index disparity. The shift to working from home means the tech-heavy Nasdaq has outperformed the blue chip-laden Dow Jones and its more vulnerable stocks such as Boeing [BOE], ExxonMobil [XOM] and Chevron [CVX].
The downside to such an impressive rebound across US indices is that inevitably breeds euphoria. A startling new Schroders global survey, seen by MarketWatch, of private investors found that they expected the markets to average 15.4% returns over the next five years, which would put the Dow Jones at a mind-boggling 52,000.
Expected average returns over the next 5 years
US election takes centre stage
The biggest unknown at the time of writing is how November’s US election will affect the markets. Most notably, the potential impact of a Joe Biden victory is made more likely by the fact that since 1912 the incumbent presidents who failed to win re-election all suffered a recession in their first term in office – like Donald Trump, according to NewsWeek.
Hypothetical President Biden’s anticipated tax hikes could impact the market but specific policies may also affect individual sectors. His plan to build on America’s Affordable Care Act, which gives the government more power to negotiate lower prescription drug prices, will, in turn, hit pharma stocks.
“Negotiated pricing would likely dent health-care sector profits,” according to Jack Ablin, chief investment officer at Cresset Asset Management. “Large pharma has trailed the market since May, when Biden gained an advantage (in the polls).”
But more immediate damage to US indices could come from the fall-out of the election itself. It also looks likely that the losing candidate — whoever it is — might contest the result, which could drag out confirmation of the presidency much longer than the six weeks it took in 2000 to confirm George W Bush had beaten Al Gore. The uncertainty led the S&P 500 to drop 7.6% during that time.
“If history is any guide, we would expect to see some initial equity market volatility as investors grapple with the resulting policy uncertainty,” Thomas McLoughlin, head of America’s fixed income at UBS Global Wealth Management, wrote in a note seen by Fortune. “Markets abhor uncertainty.”
“If history is any guide, we would expect to see some initial equity market volatility as investors grapple with the resulting policy uncertainty” - Thomas McLoughlin, UBS Global Wealth Management
S&P 500’s long-term outlook
But in the longer-term markets will slow, according to Goldman Sachs’ Kostin. In a recent note to investors, he predicted the S&P 500 to return just an average annual 6% over the next 10 years based on valuations, allocations, dividend growth expectations and the general economic outlook. “We estimate 25% of the return will come from dividends and 75% from price gains,” he said, according to Yahoo Finance.
But he added a caveat, saying that the changing stock composition — for example, Facebook wasn’t in the S&P 500 a decade ago, Tesla still isn’t — will add to future uncertainty.
It’s possible that the S&P 500 of 2030 may contain many major players that don’t currently exist. “It is arguably impossible to forecast with accuracy the long-term return of an index when firms that may be added to the benchmark in the not-too-distant future may not yet have been founded,” he wrote.
“It is arguably impossible to forecast with accuracy the long-term return of an index when firms that may be added to the benchmark in the not-too-distant future may not yet have been founded” - Goldman Sachs’ David Kostin
Others are encouraging investors to see this unprecedented time for US indices as a clean slate. Brian Belski, chief investment strategist at BMO Capital Markets, described 23 March as the “control-alt-delete” reset button for “the next 10-year bull run”.
“From every great recession and every great bear market, we've gone from despair to hope,” he said, according to BusinessInsider.