Article written by Tyler Durden
Over the past month, several key risks to markets have begun to surface, which have lead to the current, ongoing correction. The S&P has dropped by more than 10% since its recent highs, coupled with a 14% drop in the NASDAQ.
The reasons for the recent plunge (and expected to continue), are as follows:
1.The US is facing a fiscal crisis
With Congress embroiled in election-year politics and a tussle over when to fill the Supreme Court vacancy, the probability of CARES 2 getting passed before November 3 has dropped considerably.
2, COVID-19 second wave
So far, Europe has seen a greater impact from the second wave, but it is inevitable before it arrives in the US and other parts the world this fall and winter. Until we know exactly the severity of infection, further lockdowns here remain a real risk.
3. Real long-term interest rates appear to have bottomed
4. U.S. Election
Not only is there massive uncertainty with the eventual outcome, but as of its validity and timing of a definitive result
However, beyond the near term, three of the listed risks will likely be alleviated, at least partially. More fiscal stimulus in the U.S. seems ever more likely as both parties want to open up the taps but have been unable to come to an agreement (might not happen until after the election). Market pressures will likely force it sooner. Also, while progress on a vaccine and herd immunity from mask-wearing will help resolve virus uncertainty going forward. Finally, we will have a conclusion to the election (we hope) not long after the election date. Waiting for these outcomes will be tough and stressful for all market participants.
The recent correction was inevitable, and now that it has likely reached a floor, we need to start thinking about what to buy during this dip. If these near-term hurdles will be cleared by year-end, the ongoing economic recovery can continue in 2021. To me, this implies that recovery stocks should be the area of focus, particularly if real rates have bottomed out. This includes consumer cyclicals, materials, industrials and financials.
Uncertainty has rarely been higher for financial markets, but that always provides opportunities for the wicked…
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