I’m not a great one for seasonal stock market adages. The January effect and Sell in May sometimes work and sometimes they don’t. They are pretty useless when it comes to actually guiding how you should act with your investments.
Look at the long-run stats, however, and it’s quite clear that the autumn does tend to have more than its fair share of market volatility. The big crashes have tended to happen at this time of year. Put it down to the evenings drawing in, if you will, but there does seem to be a pattern.
As for this year, there’s just too much going on in the final three months of 2020 to expect markets to remain calm. The top four on my list of things to watch are: earnings season, lockdowns, Brexit and the US Presidential election.
Unsurprisingly, these are the main themes of my latest Investment Outlook.
It’s early days yet for earnings season. This week sees most of the big US banks reporting, as they are traditionally first out of the blocks with their results.
Overall, it won’t be hard for earnings to beat the dreadful second quarter numbers when earnings fell by more than 50% in Europe and by a little over 30% in America. They will still show sharp falls in profits on average, however, with year-on-year earnings likely to be 21% lower in the US and 38% worse over here.
That won’t necessarily have a negative impact on the market, however, because it’s expected and investors are already starting to look forward to better times ahead for company profits. By the first quarter of 2021 the comparisons are expected to have turned positive again and that is what share prices are focused on.
The news on the pandemic front is less encouraging. With parts of Europe, including London, heading into stricter lockdown measures, the pressure is on governments to maintain expensive support programmes in place to offset an inevitable economic slowdown. The longer-term implications for markets are negative, too, as rising debt levels translate into upward pressure on tax rates further down the track. We really can’t find a vaccine soon enough.
When it comes to Brexit, the picture is even less clear. The pound is bearing the brunt of the market’s uncertainty about whether some kind of a trading deal can be struck in time to be implemented at the year-end hard deadline for Britain’s official departure from the EU. A deal, however skinny, could help the pound a bit, but no-deal would almost certainly see further weakness in sterling. I’d say the range of possible outcomes for the pound is quite wide, maybe 15% or so.
The big unknown, of course, is the US Presidential election. The evidence from the polls is looking more clear-cut as we approach the vote on November 3. It does look like anything other than a Joe Biden victory will now be a big surprise. The larger the margin of victory, the less likely it is that the result could be contested, or doubt cast on its validity.
What is more interesting, and important for investors, is what happens in the other, Congressional election. The ability of any President to push through a policy agenda is heavily circumscribed by whether or not Congress and the White House are aligned. A ‘blue sweep’, leading to a Democrat Senate, House of Representatives and Presidency would enable the tax and spend plans already set out by the Biden campaign. Likewise, holding onto the Senate would free up a re-elected Donald Trump to push through his plans.
There isn’t a simple answer as to which of the various possible outcomes would be taken well by the market. All contain positives and negatives for investors. More spending could boost economic activity. How this is paid for might not, either because of higher taxation or rising inflation.
Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.