The month of September marked the first monthly decline for US equity markets, after having rallied strongly for five consecutive months from March lows. Despite the September weakness, US equity markets managed to close the third quarter of the year in positive territory, outperforming European equity indices and locking in solid relative returns on a year to date basis.
The S&P 500 index, which is a broad-based index for the US equity market declined by 3.9 per cent in the month of September, after having rallied by 60 per cent from trough to an all-time high of 3,580 on September 2 following the equity market slump triggered by the COVID-19 pandemic in March. Similarly, despite that the tech focused Nasdaq Composite index fell by more than five per cent in September, the index still returned more than 11 per cent on a quarterly basis, and sits on a 25 per cent gain since the start of the year. Meanwhile, European equities closed the quarter flat and 15 per cent below the level at which they were trading at the beginning of 2020.
The outperformance of US equity markets is primarily driven by the increasing signals of economic revival and a boost in market sentiment from a more dovish Federal Reserve. In August, Fed Chairman Powell announced the results of a strategic review of the Fed’s policy framework, which primarily communicated the FOMC’s adoption of a flexible form of Average Inflation Target (AIT) of two per cent, which allows monetary policy to leave interest rates lower for longer.
From a sector perspective, the only US sectors to finish the third quarter in negative territory were real estate and energy. Meanwhile, cyclical companies in the materials, consumer discretionary and industrials sectors led the gains, with double digit returns, outperforming the technology sector.
Despite the solid returns on a quarterly basis, this year’s stock winners, including US growth companies such as Amazon, Apple and Microsoft have come under pressure over the recent weeks. Market momentum started losing steam as the fast approaching November 3 US election and the recent inability for Democrats and Republicans to agree on further US fiscal stimulus, gained investors’ focus. Needless to say, news that President Trump tested covid-19 positive added further uncertainty to the upcoming election.
As things stand, polls suggest that the result of the US election will be a close call, currently signalling a win by Former Vice President Biden. If this is the case, the US election outcome on markets is largely dependent on the corporate tax reform and fiscal stimulus. On one hand, earnings are expected to be negatively impacted from the proposed increase in domestic corporate statutory tax rate.
On the other hand, Democrats have continuously called for larger fiscal stimulus packages, which the Republican Senate has so far failed to approve. A democratic win is also expected to increase focus on the issue of climate change, and offer a more diplomatic approach to trade relations.
However, beyond the short-term outlook, the key catalyst over a medium-term horizon remains the containment of the covid-19 pandemic. The progress towards news on a vaccine development, and future policy action will ultimately play a larger role in shaping the earnings and economic recovery.
Disclaimer: This article was issued by Rachel Meilak, equity analyst at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.