The nation spent most of the week wondering who won the presidential elections. While lawsuits, protests, and dueling press conferences occupied the airwaves and internet, global stock markets spent the time discounting the results. Have markets already picked the winner?

 

A Joe Biden win, with a Democrat House, and a GOP-controlled Senate was the conclusion reached by the markets on Tuesday. The "blue wave" that investors had expected and believed would unleash trillions of dollars' worth of stimulus, run up the national debt, and cause long-term interest rates to rise, was off the table. Instead, we would face at least two, if not four, years of political inertia. As I have written before, the financial markets thrive on the status quo and on deadlock. As such, the focus this week was on buying up equities that investors believe will benefit from a new political landscape.

 

"But wait a minute," say the bears, the vote is just too close to count in several states to make such a prediction. The make-up of who controls the Senate may come down to two Senators in a Georgia run-off in January. And what about the avalanche of lawsuits that the Trump campaign has announced?

 

None of the above seems to matter to the bulls. Biden's chances keep improving all week in most states, which add fuel to the equity bonfire. Trump's lawsuits were expected. The president telegraphed his intent to sue even before the elections. Investors do not see any proof that there was any wrong doing outside of the usual snafus and mistakes that take place in every election. As for the Senate, right now the numbers are split evenly between the two parties. Until and when that changes, there is gridlock on the legislation front. 

 

Under the present market scenario, any disappointment that investors won't be getting a $2 trillion-plus new stimulus package (as presented by the Democrats before the election) has been somewhat alleviated by the belief that a smaller package could be passed before the end of the year. Senator Mitch McConnell said as much this week.

 

This is important, because the second wave of coronavirus is already underway, and is expected to worsen in November through January. We need a stimulus package passed now in order to help the economy (not to mention the nation) through this winter. 

 

A blue wave stimulus package, most believe, would have had to wait until February when the Democrats took control of the House and the White House. By then, the damage would have already been done. Funny enough, with a divided Congress and new president, investors now believe the chances of compromise are higher than previously. 

 

Bond markets have also breathed a sigh of relief. Without a humongous stimulus package, the government would not be racking up as much debt to an already-ballooning deficit.  

 

On the tax front, equity investors have decided that a divided Congress would also put an end to all of Joe Biden's talk about individual and corporate tax increases. It is doubtful, believes Wall Street, that a Republican-controlled Senate would be enthusiastic about passing any increase in taxes. 

 

On the healthcare front, while both sides might agree to some necessary compromises to fix the holes in Obamacare, there likely would be little movement toward more government control of the nation's health care system as threatened by Bernie Sanders and the left.

 

This belief that changes in taxes and healthcare policies would no longer be a threat to investors is one of the reasons the technology and healthcare sectors took the lead in this week's rally. Globally, Emerging markets and China stocks also did well. The thinking here is that while Biden may still be tough on China, his actions will be more measured and diplomatic. The unsuccessful on-again, off-again tariff strategy of the previous administration would likely take a back seat to coordinating a policy with other nations that might also harbor China trade grievances.

 

That said, I expect some pullback in the markets after this week's run up, but that doesn't make me bearish on the stock markets. Instead, I still see gains throughout the remainder of the year and new highs for the S&P 500 Index and NASDAQ. The U.S. dollar may also continue to slide. In which case, foreign markets (especially emerging markets), resource plays, basic materials, industrials, and precious metals sectors should continue to gain as well.

 

 However, I remain greatly concerned that in the weeks ahead the pandemic will get much worse across the nation.  COVID-19 cases and deaths are expected to rise. Most of the macroeconomic numbers still indicate a rebound in the economy, but that is backward looking data.

 

Rural hospitals, especially in those parts of the country that have not followed medical protocols, look to be coming apart at the seams. I expect the government will continue to sit on its hands (except to pass a smaller stimulus bill) and hope for a breakthrough on the vaccine front. But hope is not a strategy. If the economy and employment gains slow and even reverse in the meantime, investors would probably be looking to the Fed once again to save the markets, and I expect they will.

 

Hope springs eternal, but even the most strident bulls threw in the towel this week. American politics took precedence over the country's economic well-being once again, as both political parties refused to compromise on a stimulus deal.

 

But it wasn't only politics that spooked investors. Across the Atlantic, investors watched as COVID-19 outbreaks escalated across Europe. Germany, Austria, the Czech Republic, and Italy reported new records in infections, while France announced a curfew in order to stem their own skyrocketing cases. In the U.K., Londoners are now banned from mixing with other households indoors.

 

In this country, despite denials by a large portion of the population, as well as some in government, coronavirus cases are surging across the nation. In the fall, schools, despite warnings by medical authorities, opened anyway with predictable results. Students became super spreaders, infecting their classmates and extending the infection into the surrounding communities. Now, U.S. medical experts are warning that the onset of cold weather and increased inside activities could generate a second resurgence of the coronavirus.

 

What could this mean for the U.S. markets and national economy? If we follow in the footsteps of the European Community, the U.S. could see an avalanche of new restrictions forced on individual cities and states, not by the government, but by the coronavirus. That's just for starters. Businesses would likely close, but if past actions are any indications, that would have to wait until our already-weakened national hospital system ran out of beds and hallways to treat coronavirus victims. Let's hope this doesn't happen, but you should be prepared if it does.

 

Only now are investors beginning to realize that a "cure," or at least a vaccine (despite the many statements of our officials outside of the medical community) is taking far longer than promised. It appears that even if there is a breakthrough tomorrow on this front, it would be far too late to save the country, or the economy, from a potential winter COVID-19 surge. 

 

Despite the difference of opinion between who is right, or wrong, what is fake news, and what isn't, there are two truths that investors should understand. Number one: COVID-19 could care less about what you think, whether you wear a mask or not, or who you are going to vote for. It will do what pandemics do, so adjust accordingly. In my opinion, the best advice so far has been given by the medical community. Listen to it.

 

Number two: the stock market calls it as it sees it. It can be wrong at times, but only for a short while. In the end, the market ignores the hype, but not the facts, leaving investors who ignore its directions holding the bag.   Right now, the U.S. markets are not giving us clear guidance, which reflects the uncertainty of this health crisis, lack of more stimulus, and the noise of the political elections, so look elsewhere.

 

Europe appears to be 4-6 weeks ahead of the U. S. in their battle with the coronavirus. Investors should therefore be following the events in Europe closely. If additional restrictions begin to pile up and/or the virus cases continue to rise, watch and compare what happens to Europe's main stock indexes as a prelude to what might happen in the U.S. in November.

 

The markets will continue to move up and down next week, as they have this week. As for the future, what I can promise you is that over the next 18 days, markets will become even more volatile than they have been month-to-date. After that, it depends on COVID-19.

 

As the U.S. presidential elections approach, politics are becoming a bigger factor in what is moving the stock market. Some investors are already betting on the winner, and positioning their portfolios for an expected outcome. It is a risky bet to make.

 

As of this week, many on Wall Street are positioning for what they expect will be a "Blue Wave" where both houses of Congress and the next presidency of the United States will be captured by the Democratic Party. What, you may ask, is their reasoning, aside from partisanship? 

 

Well, the number of polls that put Joe Biden in a widening lead, for one thing, as well as waning support for Republicans (once again, according to the polls) in general. Given the last election, and how badly the polls turned out, one might at least have waited until the numbers reflect a higher probability of success, but when has Wall Street ever shied away from risk?

 

This week, therefore, cyclical sectors came back into vogue. A big stimulus package plus talk of a huge infrastructure package under Biden sent basic materials and some industrials flying. Alternative energy plays, home builders, small cap stocks, and even some cannabis stocks were bid up. Technology did OK, but was not the focus of attention.

 

While the financial media is focused on the minute-by-minute political machinations of will there or won't there be a stimulus bail-out package before the elections, investors have come to the conclusion that when doesn't matter. Just as long as there is one. The thinking goes that a Blue Wave victory would up the ante on fiscal stimulus by several trillion dollars. In turn, that would certainly help the economy, and with it, the stock market.

 

But what about the tax increases that are almost certain to come with a Democratic sweep? 

 

In times past, higher taxes have hurt the markets and the economy. Evidently, more stimulus outweighs any tax increase, according to current thinking. Aside from investors, the Federal Reserve Bank is also cheerleading more fiscal stimulus. Fed Chair Jerome Powell spoke this week at the National Association for Business Economics. Powell, while commenting on the need for more — not less — fiscal stimulus, said, "By contrast, the risks of overdoing it seem, for now, to be smaller. Even if policy actions ultimately prove to be greater than needed, they will not go to waste."

 

During the last few days, investors were blindsided when President Trump at first called off stimulus negotiations with the Democrats that had been going on for weeks. Nancy Pelosi, the speaker of the House, wanted $1 trillion more than the Republicans were willing to spend. After the president’s tweet, markets fell out of bed closing down on Tuesday by well over 1 percent. That night, Trump had a change of heart and now is offering a partial, case-by-case deal to the Democrats. That was followed by word that he had changed his mind again and was now looking for a comprehensive package. I expect this horse trading to continue, but any substantive deal will likely have to wait until after the elections.

 

Nonetheless, the drama is sure to continue swinging markets up and down on a day-to-day basis. Those should not surprise my readers, since it is the scenario that I predicted would occur throughout the month of October.  

 

But saying that, I am still bullish overall on the markets. My advice is to try and ignore the election noise, and instead focus on the future where I continue to see gains.

 

First, the good news: there is only one more week until the end of the month. The bad news, however, is that October may not treat investors any better than did September. As my swabbie friends would say, is it time to "batten down the hatches?"

 

Let me say I take no joy in being right. During the last few weeks of writing, the volatility I predicted has come home to roost. This kind of correction is especially painful because in these times of great uncertainty, we could have at least pointed to the stock market, and our investments accounts, as one piece of good news. 

 

As I wrote last week: "Investors, therefore, should be mentally and emotionally prepared. If you witness days, or even weeks of ups and downs, don't be surprised. It would not surprise me to see several pullbacks, only to regain those losses, before selling off once again."

 

That quote sums up the market action throughout this week. All of the worries I have enumerated: the possibility of a winter wave of coronavirus, a slowing economy, the elections, and China trade have converged to drive most financial instruments lower. 

 

Global stocks, commodities, interest rates, even high-yield junk bonds (the last instrument supposedly supported by the Federal Reserve Bank), fell hard. Gold, thought to be a safe haven, "go to" investment, was also clobbered, hitting a low of $1,850 an ounce late in the week. Only the U.S. dollar climbed, staging a big comeback from its multi-week lows. 

 

After last week's declines, some investors hoped that we had seen the worst, but nothing has really changed. The president, who uses the stock market as his barometer of success or failure, added yet another worry to our growing pile of concerns. Wednesday evening, President Trump, in response to a reporter's question, refused to commit to a peaceful transfer of power, if defeated in November. It wasn't the first time the president has said that, but investors took his comments seriously this week. As for me, I chalk it up to campaign rhetoric, but it illustrates the point I have been making about volatility. 

 

We have an entire month ahead of us in which we should expect heated comments from both sides on so many issues that I lose count.  The Supreme Court vacancy after the passing of Ruth Bader Ginsberg is just the latest controversy, but there could be others. Driving further downside in the markets, for example, could be revelations dealing with the president's tax returns and/or Vice President Joe Biden's (and his son's) history with Ukraine. Further accusations of foreign interference in U.S. elections, and/or additional mail-in ballot issues could be with us up until, or even after, the actual November 3 election. All of these possibilities could add fuel to the fire throughout October's stock markets.

 

On the plus side, a coronavirus vaccine could be in the offing as early as next month, according to the President. While most pundits believe another stimulus deal is dead in the water until sometime after the elections, who knows? The Democrats are readying another stimulus plan with a $2.4 trillion price tag. That is down from the $3.5 trillion bill the House passed a few months ago and could be on next week's agenda for passage. 

 

Unfortunately, the Republicans' Senate, with a few exceptions, does not seem willing to compromise, and they are sticking with their own $500 billion proposal. That could change if the markets really take a hissy fit. It might be just enough to get the two sides talking again.

 

Any or all of the above considerations could cause market swings of anywhere from 3-7 percent in both directions. It might be a day trader's dream, but it could also be their worst nightmare. My advice is to stay out of it. 

 

If things fall apart from here, I could see the S&P 500 Index pull back into the 3,050-3,140 range.  If the lower end of that guesstimate were to happen, we would be looking at a 15 percent decline from top to bottom. I hope not, but if so, take your lumps and wait until the smoke clears in November, or possibly December.