Following record index levels in August, September marked a turning point in markets. The S&P 500, along with other indices, peaked on 2nd September and fell close to 10%, finishing the month down 6%. There was not a specific catalyst driving this fall, but the heady rise of the market and resurgence of the COVID outbreak in Europe led investors to take some profits. The selling was focussed on the tech sector and those associated companies that led the rally. While there are valid reasons to believe that fundamentally many of these companies have benefitted over the last six months, the valuations at which these shares were trading has become increasingly difficult to justify.
In the UK, figures released by the ONS last month showed that the economy grew by 6.6% month on month in July, on the back of an 8.7% growth in June. Unfortunately, this still leaves the economy 11.7% down from pre-COVID levels seen in February. While dramatic, the volatile monthly figures do not provide a good insight into the state of the economy and the longer-term trajectory. Clearly, much of the “growth” reflects the reopening of shut down sectors, catch up demand and restocking of inventories. Given the current restrictions and damage to the economy, it is unlikely that the lost ground can be recouped in the short term.
Furthermore, the planned Autumn budget was cancelled in the month as a flare up in COVID cases in the UK left the chancellor scrambling to amend and introduce new stimulus measures. Plans to replicate schemes used in Europe allowing employers to bring back workers part time, with the remaining wage subsidised by the government won support from struggling industries. While extending furlough was the preferred option for many, the government is keen to ensure that the labour market is flexible, and workers retrain and move to areas of new demand. By ensuring that there is some demand for a role, it attempts to certify that employers have a need rather than just keeping workers on as an option with no cost. Although in the short term this may be more painful and may lead to a higher rate of unemployment, it should pay off over the coming years as the country is better positioned to operate in the new environment.
In the US, the Presidential election is now heating up. Voting day is on 3rd November. Biden is still leading in the polls, although the margin has narrowed over the last few weeks and the difference is too close to call in many key swing states. Commentators are predicting that there may be a drawn-out confirmation of the result as both sides may demand recounts and table legal challenges. The use of mail in voting has been an area of particular focus as it is expected that their use will be at a record level in this election. For markets, this may mean that there are larger than usual swings for several days following the vote as traders attempt to price in a rapidly evolving situation.
While the pullback in markets has taken the edge off valuations, the exceptional risks now present do not mean that this will provide support. Indeed, the S&P is still over 40% up from the lows of March. Investors will be keen to see further rounds of stimulus from governments to support markets, although another round of increasing restrictions may be the final straw for many companies that were already on the brink.