S&P 500 : Potential Downtrend

(Tue, 6 Oct 2020). Phil Orlando, Federated Hermes chief equity market strategist, pinpoints two potential catalysts for an S&P 500 downtrend.

Federated Hermes chief equity market strategist Phil Orlando considers the election and rising COVID-19 cases as threats to the S&P 500. Economists have lowered their forecast for the fourth quarter, projecting a 4.3% annual economic contraction. Growing uncertainty and nervousness in the markets amidst a declining economy pose major threats to U.S. equities. Phil Orlando, Federated Hermes chief equity market strategist, pinpoints two potential catalysts for an S&P 500 downtrend.

First, the fund manager said a Democratic wipeout of the election would pose specific threats to the markets. Second, Orlando voiced concerns over the rising COVID-19 cases in the U.S. approaching the winter season.

A multi-trillion dollar stimulus package and vaccines could offset both negative factors, the executive explained. But, with stimulus and vaccines far from the horizon, another S&P 500 slump could occur.

A Democratic Win at the Election is a Problem For an Already-Battered S&P 500

The election continues to be a persistent narrative in the S&P 500 performance in the fourth quarter. Initially, strategists drew concerns towards the possibility of a contested election. Over time, the fear shifted towards additional regulation and tax burden in a Joe Biden presidency.

The U.S. stock market has performed relatively well under tax-heavy administrations in the past. The difference is that the S&P 500 is currently a vulnerable position heading into 2021. During a period where economists sound the alarms on severe stagnation, additional pressure could slowdown the S&P 500.

This week, 52 economists surveyed by the National Association for Business Economists forecast lowered their economic growth forecast. In June, economists predicted the U.S. economy to grow by 6.8% in the fourth quarter. On October 5, economists cut their prediction to 4.9%, projecting an annual economic contraction of 4.3%.

Economists worry that the slowing economic growth would spill over to other major metrics, like the unemployment rate. Although the S&P 500 does not directly reflect the economy, strategists find that they are not entirely disjointed.

COVID-19 Cases Continuously Rise With High a Baseline

The number of COVID-19 cases in the U.S. is increasing with no signs of reaching a clear peak. U.S. President Donald Trump’s unexpected positive COVID-19 test intensified fear in the markets.

Orlando says he fears a third wave of cases, especially as colleges restart. The markets counted on vaccines to be delivered before the election, but that is becoming growingly unlikely.

Moderna recently told the FT that their vaccine would not be ready before the election for an FDA approval. The worsening outlook of vaccines in the near term and the rising cases pose a threat to the S&P 500.

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