Erik T. Long
Oct 27, 20202 min
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We would not be surprised to see more bouts of weakness in the US stock market like the one at the start of this week with further fiscal support not imminent and the coronavirus continuing to spread rapidly. However, we think that the conditions are in place for some recent trends in sector performance to reverse over the coming months.
To recap, the S&P 500 fell by ~2% yesterday and has opened lower today, continuing a trend that started around the 12th of October, when a raft of new restrictions were imposed in Europe and virus cases in the US started rising quickly again.
While the pattern has not been identical, the fall in the S&P 500 since 12th October has had many similarities with previous episodes when new coronavirus cases rose sharply. For example, the communication services and healthcare sectors have been among the most resilient sectors. And the energy sector, which was hit hard in the initial phases of the pandemic and again in June when concerns about second waves emerged, has also underperformed this time around. There are also some differences: the information technology and consumer discretionary sectors have underperformed this time, while they were among the best performers back in February/March and again in June.
We continue to expect the virus to be brought back under control over the coming months and a safe and effective vaccine to become widely available relatively soon. So, to the extent that the underperformance of many coronavirus-vulnerable sectors has been driven by concerns about rising case numbers and new restrictions, it seems reasonable to us to expect this to unwind once those numbers fall back again.
Depending on the result of the US presidential election, a few other factors might end up pushing in the same direction. First, a big fiscal stimulus by the Democrats might benefit coronavirus-resilient sectors less than other sectors. Admittedly, there are some reasons to think stimulus might not be as large and as quick as investors appear to expect. But we suspect a Democratic clean sweep would still result in a larger stimulus than otherwise. Second, as we argue here, Joe Biden’s proposed corporate tax plan could weigh more significantly on technology and pharmaceutical companies than many others. Third, an antitrust push against big tech companies in the US is more likely to continue under a Democratic administration. (Simona Gambarini)