Expected return outlook for US stocks and major assets for the fourth quarter
There were huge fluctuations in all types of assets in the third quarter. What opportunities and challenges will investors face in the global financial markets, including the US stock market, in the fourth quarter? This article analyzes some macro drivers for the fourth quarter, suggests the main risk points, and makes some predictive analysis for your reference.
I. A brief review of the returns on major asset classes in the third quarter
The financial market fluctuated greatly in the third quarter. Although major US stock indices hit record highs at the same time in August, there were sharp declines one after another in September, and all gains of the previous month were erased. In fact, September was a rare “total loss” month in history. From US stocks, to bonds, to gold, to crude oil, to real estate, all major asset classes have negative returns. The only positive return was cash in dollars. The US dollar exchange rate appreciated against the world's currencies as a whole, and the US dollar index rose 1.9%. The figure below shows the September returns for the world's major asset classes, returns since this year, and returns over the past year and the past three years:
(Returns by major global asset classes)
It can be said that due to the appreciation of the US dollar, even the traditional safe-haven tools gold and US Treasury bonds have caused investors to lose money. Gold fell 4.2% during the month. Of course, the global stock market and real estate market also fell by more than 3%. The Nasdaq index, which is dominated by US technology stocks, has fallen by more than 11% in the last four weeks. Among them, many leading stocks such as Tesla Motors, Apple, etc. have fallen by more than 20% to 30%. The implied volatility of US stocks, VIX, has been hovering around 30% for a long time, far higher than the normal market situation of about 20%.
The biggest risk to global financial markets in the second and fourth quarters: the US election
This year is the US election year. According to the US Constitution, the first Tuesday in November is voting day. This year's polling day is November 3. 70% of the US population has the right to vote. Approximately 230 million voters will elect the US president, vice president, senators whose one-third term in the Senate expires, all members of the House of Representatives, governors of each state, state legislators, judges from each county, etc. Since the two parties in the US have huge differences on various issues such as the economy, society, trade, and law, this general election will have an extremely important impact on the future direction of the United States. The author will briefly analyze the two parties' main agenda for financial policies.
If the Democratic Party wins the White House, a majority of seats in Congress, the governor, etc., their financial policies mainly include raising taxes for businesses and individuals, increasing supervision, increasing social welfare, increasing medical security, environmental protection, trade protectionism, etc. Candidate Biden proposed that the US corporate income tax will be raised from the current 21% to 28%, and the minimum tax rate for businesses will be added at the same time. The reason he made these claims is that large US tech companies, including Amazon, have avoided taxes around the world and have basically achieved an effective tax rate of zero. He believes this situation is unfair to other businesses that pay taxes. At the same time, America's current fiscal deficit is soaring, and the government needs to increase fiscal revenue.
(Industries most affected by Biden's tax increase plan: communications, consumer goods, information technology)
If the Republican Party wins the election, their financial policies include a second round of tax cuts, deregulation, privatization of health insurance, promotion of bilateral free trade negotiations, etc. The Republican Party has traditionally had relatively favorable policies for manufacturing and energy, and there are no very strict regulations on environmental protection. Finally, the Republican Party's policies have a greater advantage for American SMEs.
As far as investors are concerned, Wall Street's conclusion is that if the Democratic Party comes to power, they can better allocate European, Asian stocks, and lower US stocks. In terms of industry selection, we need a high-grade pharmaceutical industry, a new energy industry, and a low-grade medical insurance industry. In terms of market capitalization, there is a need for high-cap stocks and low-allocation small-cap stocks.
If the Republican Party continues to govern, it can place high dividends on US stocks and low on European and Asian stocks. In terms of industry selection, the traditional energy oil and gas sector, medical insurance sector, and manufacturing sector can be highly qualified. In terms of market capitalization, US SME stocks can be highly valued.
Another risk for global financial markets in the third and fourth quarters: the coronavirus
The coronavirus outbreak had a serious negative impact on the global economy. In particular, the service industry, transportation industry, and global trade in various countries are having a huge impact. At present, China's economy has rebounded rapidly, but from European and American countries to major emerging market countries, the epidemic has not been completely controlled. With the advent of fall and winter in the northern hemisphere, the incidence of respiratory diseases will generally rise. If a second wave of COVID-19 were to occur, it would be a huge blow to the economies of all countries. Corresponding financial markets will also experience a sharp drop in the stock market and a rapid rise in volatility. Of course, the most important focus right now is the COVID-19 vaccine development situation. Currently, there are several COVID-19 vaccines in clinical testing around the world. If the vaccine can be proven to be effective and introduced on a large scale, it will be of great benefit to the global financial market. If vaccine development is repeated, delayed, etc., financial market turmoil is inevitable.
IV. Prospects
From an optimistic point of view, after the US election in early November, no matter who is elected, global financial markets will have a chance to experience a restorative rise. The author also believes that the COVID-19 vaccine will make great progress in the next few months and begin to invest heavily in society. Judging from the seasonal factors in the financial market, the month with the best medium- to long-term performance for US stocks is generally from October of each year to May of the following year. In particular, the “Christmas rally” starts in mid-November, and is usually a period of relatively strong rise.
Therefore, we recommend remaining relatively cautious in October and increasing fixed income products such as cash reserves, high-allocation gold, and treasury bonds. Beginning in November, stock market positions were increased on dips, cash positions were reduced, and exposure to fixed income products was reduced. Judging from industry choices, maintain a balanced allocation and focus on the healthcare industry and the science and technology innovation industry. When choosing products, try to pay more attention to products with good cash flow and low leverage.
Finally, let's briefly discuss the US real estate market situation. After the outbreak of COVID-19, the US real estate market underwent significant changes. As a large number of people moved out of the city center and began to work remotely in the suburbs, including high-end high-rise residential prices in New York's core areas of Manhattan and San Francisco, plummeted, while the prices of independent villas in mid-sized cities in the southern United States and suburbs near major northern cities rose, and supply was in short supply. Therefore, there is currently an abnormal situation where the US national residential real estate price index has risen sharply, but housing prices in New York have bucked the trend and plummeted. In the commercial real estate sector, there is also a very abnormal situation at present. Due to the pandemic, tourism, meetings, etc. were drastically reduced, leading to the closure of a large number of hotels and a sharp drop in retail property prices. However, demand for industrial real estate such as logistics, medical care, and data centers is extremely strong, leading to a sharp rise in the price of these properties. It can be said that the current fragmentation of commercial real estate is an abnormal phenomenon that has never occurred before. Investors can pay attention to bottom-up opportunities for some of the stressed assets in the fourth quarter.
