Wall Street not fazed or confused by US Presidential Elections; is the worst over for US stocks?

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Updated: Nov 05, 2020 1:16 PM

Prices might not be that attractive at the present juncture. However, Morgan Stanley’s Chief US Equity Strategist believes that stock markets have now sold off on election concerns and concerns around the second wave.

US stock marketThe world economy and corporate earnings will return to pre-pandemic levels in 2021, according to UBS forecasts.

Wall Street has seen a decent start to November so far. Even a nail-biting US Presidential Election, which threatens to end with a court battle, has not dashed the hopes of investors. S&P 500 has gained 4% in the last two days, while NASDAQ has jumped 5.7%. Now the question stands — is the worst of the correction over? Between the October 12 till the end of the month, Dow Jones, S&P 500, and NASDAQ all slipped over 7.5%, and have now recouped more than half of those losses in just two trading sessions.

Correction over

“The worst of the correction is over in our view, but we still think the next month is likely to remain volatile and uncertain as we navigate what is shaping up to be a much closer election than expected just a few short weeks ago,” said Mike Wilson, Chief Investment Officer and Chief US Equity Strategist for Morgan Stanley, in a recent podcast. Morgan Stanley had two weeks ago suggested that stock markets were due for another 10% correction. The call was given based on their view that valuations were too high given the risks aligned.

Strong business cycle: Buy on dips

“The bottom line for us is that the correction we expected is now mostly finished and adding to equities on further bouts of weakness this week is recommended,” Mike Wilson said. Keeping aside the uncertainty of the Presidential Election, Wilson said that the good news is that they at Morgan Stanley think the US economy will be very strong next year to face any electoral verdict. “In short, the business cycle dominates the political cycle, especially when we’re so early in a recovery like today,” he said.

Vaccine hopes: Economy opening up

Secondly, the optimism is driven by the hope that a viable vaccine is now close to being approved. Although with a second wave coming the possibility of a lockdown is not being ruled out but, a better understanding of the virus could help fight the second wave better than the initial outbreak. “That means by spring, we should be fully open in the economy, with safe participation by most people,” Mike Wilson added. The timing of the opening up of the US economy and the pace of it will be a key factor that will need to be tracked.

No more known unknowns

Prices might not be that attractive at the present juncture. However, Morgan Stanley’s Chief US Equity Strategist believes that stock markets have now sold off on election concerns and concerns around the second wave. “The bottom line for us is that both are known unknowns at this point and well understood, if not fully discounted. In our view, both will be resolved over the next three months and that means higher equity prices over the next year,” he added while suggesting investors stick to stocks that could benefit from the opening of the economy such as consumer services, financials, materials, and industrials.

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