What a month August has been so far, with the S&P 500 Index up more than 7%, for the best August since 1984. Not to be outdone, this is the first time in history August saw two separate 6-day (or more) win streaks. Last, with one day to go, the S&P 500 has gained 16 days so far this month, for the most since 16 in April 2019. Meanwhile, it is the most up days for any August since 2003.
A second term for President Donald Trump would likely feature a continuation of the pro-growth policies from the first term of his administration, and importantly for financial markets, a continuation of the status quo. 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. We look more closely at what a second term for Trump could mean for the economy and markets.
This week in the LPL Market Signals podcast, LPL Financial’s Chief Market Strategist Ryan Detrick and Equity Strategist Jeff Buchbinder discuss the impacts of a potential Joe Biden victory. “Of course tensions are high as we head closer to the election, but don’t forget that stocks tend to do just fine, regardless of who is in the White House, as long as the economy is firm,” according to Ryan. “With many parts of the economic data showing continued improvement, there’s a good shot the economy will be on the upswing as we head into 2021.”
The incredible rally off the March 23 bear market bottom continues, with the S&P 500 Index up more than 50% from those fateful lows. It feels like a lifetime since the longest bull market ever ended. Remember though, although the recent bull market was the longest, it wasn’t the greatest, as the 1990s bull gained more on a percentage basis.
While a potential Biden presidency may mean a shift from some pro-growth policies of the Trump administration, it’s possible any negative market impact may be muted. Economic forces tend to dominate policy, though policy still matters, and historically, markets and the economy have shown little preference for either Republican or Democratic leadership. While there are risks associated with potentially higher taxes and increased regulation, and specific industries may experience a meaningful impact from policy shifts, for markets overall, there’s a real possibility that it may be just business as usual.
“Better late than never.”
It took a while, but the S&P 500 Index finally made a new all-time high, coming all the way back from the vicious 34% bear market in less than six months.
Earnings blew away expectations that ended up being way too low. With 92% of S&P 500 Index companies having reported results, the average upside surprise has been 22%, which we believe is the highest ever recorded going back several decades. At 82%, the percentage of S&P 500 companies that beat earnings targets is the highest since FactSet began tracking that statistic in 2008. Earnings are still tracking to a significant 33% year-over-year decline, but that’s certainly better than the 45% decline reflected in analysts’
estimates when reporting season began (source: FactSet).
One of the most difficult questions for investors to answer right now is how can the US economy be struggling so much while the stock market keeps churning higher? Even harder to answer questions are: When will that gap close and what will be the catalyst that starts to close it? We highlight some differences between the stock market and the economy in an attempt to explain the disconnect.
The 10-year Treasury yield is historically low, so low that it could climb a full 1% before the end of the year and still be the lowest year-end yield on record, with room to spare. Historically low rates come with a genuine concern that they can reverse and climb higher, which could be painful for Treasury investors. The good news: As shown in LPL’s chart of the day, four out of five of the worst years for estimated 10-year Treasury returns have been mid- to late cycle, which is not the stage that we’re in now.
Real-time economic data continues to show a slowdown, at the same time we’re entering two months of the year that historically have been troublesome for stocks. Meanwhile, gold is breaking out to new all-time highs, confusing many as to what it all means. Stocks are likely due for a breather, but it isn’t out of the ordinary to see both gold and stocks trend higher together.