Market volatility returned this past week, as the S&P fell -5.6%. Market jitters crept back into share prices due to the combination of a nearing election, a spike in the number of COVID cases across the globe, and the inability for politicians to agree on additional stimulus before the election. These overarching influences created a change in sentiment as investors took to realizing profits by selling riskier assets such as stocks and high yield bonds. This shift overwhelmed what has been very strong 3rd quarter earnings reports from companies.
This week’s pullback was rational given the swift rebound in share prices since the pandemic hit in March. The ambiguity surrounding the election and stimulus is short-term in nature with resolution to these concerns likely to occur over the next month or two. However, in the interim, we believe it’s reasonable for investors to expect greater volatility both to the upside and downside. Downturns are never pleasant to endure; however, few people are invested for the next month or two. It’s important to look past concerns around a contested election or whether stimulus will be passed. As a country, for the last 244 years we’ve had peaceful transitions of power. Some, like in 1876 or 2000, took longer to sort out, but they did occur. On the stimulus front, both parties acknowledge more stimulus is necessary. It’s just a question of how much and who receives it. Therefore, it seems highly likely that an additional stimulus package will transpire in the next few months.
Long-term, we remain optimistic. If the election results in new policies, those are likely to be sorted out over time and markets have historically digested them in a gradual and rational manner. On the stimulus front, we view the monetary and fiscal stimulus plans initiated to date as having been highly effective which has created a floor in security prices as the government has signaled a willingness to stimulate demand as needed. As a result, we believe there is less downside risk to markets than we had thought at the beginning of the pandemic. We encourage investors to look through the down markets of the past week and any potential volatility that is to follow. Volatility is often a catalyst for creating mispricing of assets, which can lend themselves to future investment opportunities.