Rising coronavirus cases, inability to pass a stimulus bill, and pre-election jitters combined to drive stock prices lower in October. For a second consecutive month, technology shares underperformed the broader market while small cap companies were able to post modest gains.
Despite the election gobbling up most media attention in October, markets were likely more consumed by the frightening spike in virus cases in Europe and subsequent shutdown measures. England closed restaurants and bars, and France effectively initiated quarantine, though schools remain open. As was the case in the spring, we can assume that the trends in Europe will repeat in the U.S. after a few weeks of lag time. We should not assume, however, that market reaction will be the same — either at the macro level or among sectors and styles. Much of the accelerated transition away from in-person to digital has already been priced into stocks during Q1.
Lagging Election Results Likely to Increase Daily Volatility
Leading up to the election, there was increasing expectation for a blue wave, and with it a massive stimulus package and potentially higher corporate taxes. While actual impact is always impossible to predict, many investors believed this would lead to higher interest rates and higher inflation, favoring value companies at the expense of the mega techs. We still do not know the full outcome, but the blue wave did not happen on election night.
While we can all guess, there is little clarity on what any election results will mean for overall market direction or sector winners. Many of the initial predictions from 2016 turned out to be backwards.
At the time of this writing, it does appear likely the election will be contested for days or weeks, with likely increased daily volatility until there is clarity.