When the S&P 500 closed at 3363 on 30 September, it was the end of another quarter of strong gains. Q3 saw the index climb 8.6%, having started July at 3143.64. This capped a recovery that began in mid-March, following the steep coronavirus market sell-off.
Since that low point, the S&P 500 has rebounded circa 50% and is currently up 4.96% for the year-to-date (as of 7 October’s close).
That’s not to say there has not been volatility in the index. Since hitting a historic high of 3588.1 on 2 September, the S&P 500 has slipped 4.51%. This is partly due to September’s tech sell-off, but it also reflects the growing uncertainty around the US economy in the run up to the presidential election.
S&P 500 price gains since March low
So, what do the next three months have in store for the S&P 500?
The US election and the S&P 500's fourth quarter
Q4 got off to a rocky start for the S&P 500, after President Trump tested positive for coronavirus. This news was enough to see the S&P 500, Nasdaq and Dow Jones all finish down the first week of October.
Trump's subsequent return to the White House saw the US markets rally, and it is becoming increasingly clear that the S&P 500's fourth quarter will be heavily influenced by the US election. A win for Joe Biden could see tighter regulations and increased taxes, but it could also be good news for renewable energy stocks. A Trump victory would provide a continuation of the status quo, with likely beneficiaries including the energy and tech sectors.
“Markets don’t like uncertainty, and while Trump’s negotiating style has been unpredictable at times, his commitment to lower taxes and deregulation may provide a consistent, market-friendly policy environment,” said Ryan Detrick, chief market strategist for LPL Financial.
“Markets don’t like uncertainty, and while Trump’s negotiating style has been unpredictable at times, his commitment to lower taxes and deregulation may provide a consistent, market-friendly policy environment” - Ryan Detrick, chief market strategist for LPL Financial
The one apparent certainty is that we are heading into a period of increased volatility. In a poll of 20 analysts conducted by CNBC, 11 predicted a contested election would see the S&P 500 drop between 5-10%, while another 5 said it would fall over 10%.
Will a stimulus package help the S&P 500?
The S&P 500 has been edging higher this week as investors try to guess if and when an additional economic stimulus package from the federal government will materialise.
“The big wild card in the US is whether we get more fiscal spending or not. The political backdrop is just so toxic," said Gregory Perdon co-chief investment officer at private bank Arbuthnot Latham.
“The big wild card in the US is whether we get more fiscal spending or not. The political backdrop is just so toxic” - Gregory Perdon, co-chief investment officer at Arbuthnot Latham
Much of this toxicity stems from the battle between Nancy Pelosi, the House of Representatives Democratic speaker, and Steven Mnuchin, the US treasury secretary. The White House has said it will approve a $1.6trn spending stimulus, short of the $2trn wanted by the Democrats.
However, things took a z-turn this week when President Trump stunned the markets by suspending talks until after the election.
“I am rejecting their . . . request, and looking to the future of our Country. I have instructed my representatives to stop negotiating until after the election when, immediately after I win, we will pass a major Stimulus Bill that focuses on hardworking Americans and Small Business,” Trump declared on Twitter.
Following that tweet, the S&P 500 fell 1.5%. With the election not due until 3 November, hopes of an agreement seem far off and October’s choppy start looks set to continue.
So, where will the S&P 500 end 2020?
In the CNBC poll, 8 analysts predicted the S&P 500 will finish the year somewhere between 3400 and 3600, a 0.57% downside to 5.28% upside on 7 October's close. From there, the estimates become more bearish, with 5 predicting the S&P finishing between 3000 and 3200 on 31 December, which would see a decline of 12.27% to 6.42%.
Corporate earnings could well help the pace of the recovery, with expectations being that the recent economic rebound will translate to better earnings. Of course, it won’t take much for the earnings to be better than last quarter's sea of losses.
“If you look at the market, it’s telling you that we’re going to get a recovery next year. I’m convinced we’re in a new bull market,” said Patrick Spencer, managing director at US investment firm Baird.
“If you look at the market, it’s telling you that we’re going to get a recovery next year. I’m convinced we’re in a new bull market” - Patrick Spencer, managing director at Baird
Whether Spencer is right depends on a number of things, including whether coronavirus infections increase over the colder months, when a vaccine will be made available and the toxicity of US politics right now. Among the optimists are Goldman Sachs, who expect the S&P 500 to hit 3600 at the end of December, a 5.3% upside on 7 October’s close.