Market Update September 2020 – Confident Markets Without the Consumer’s Confidence?


It was bound to happen.  Since the March low, the equity market’s rebound had provided gains each month through August.  But September saw a pause as investors took a break to assess where the global economy stood following five-plus months of higher prices.  And there has been plenty to consider.

First, not all stocks had been invited to the party.  At the recent September 2, 2020 peak of the S&P 500 Index, the index was 5.8% higher than its previous high on February 19, 2020.  Yet, 288 of the index’s stocks remained below their respective February highs.  With this in mind, it is not surprising that the S&P 500 Equal Weighted Index (all stocks in the index held at the same weight) remained 2.5% below its February 19, 2020 level.  Following this peak, the S&P 500 Index declined 6.9% through September 30 while the equal-weighted index declined 4.9%.

Second, gains during 2020 can be attributed to price-to-earnings or “multiple” expansion.  Or, stating the obvious in other words, as business has grappled with the effects of the COVID-19 pandemic, price appreciation has not been supported by current earnings growth but has been driven by optimism for 2021.  Survival has been a good place to start for many businesses, but those with expected earnings growth during 2020 are a small group.  This dynamic is not necessarily a bad thing as stock prices always reflect investors’ opinions regarding future price levels.  But this does set up a high expectation for continued recovery in 2021 with potential ramifications if next year disappoints investors.  Which leads to the election…

To date, the general market opinion has been that if the current administration retains the White House, policy will continue to be business friendly.  Or, if there were to be a Democratic sweep of the White House and Congress, policy would likely include tax reform resulting in higher rates for at least a portion of certain individuals and businesses.  And these higher tax costs have, historically, cut into consumer spending and business profits, a scenario that would challenge high equity market valuations looking for a continued rebound in earnings growth in 2021.

But, as the election campaign has progressed, a different paradigm is beginning to evolve.   If there is a one-party sweep of the White House and Congress, either party would likely move to initiate additional fiscal stimulus measures.  And since 2009, markets have been pushed higher as these measures enter the economy and capital markets.  The likelihood of a Republican sweep is low, but, if there were to be a Democrat sweep, would current economic conditions suffice to slow the pace of implementation of higher tax rates?  Could tax reform create a base for additional economic support through further fiscal stimulus?  The jury is out on the conclusions, but the stakes are high for either party’s first steps, post-election.

CHART OF INTEREST – Confident Markets Without the Consumer’s Confidence

For some time, the mood of the consumer has appeared to be linked to the direction of the equity markets.  Or, the equity markets have behaved in-line with the confidence of the consumer.  Chicken or the egg?  Regardless, the chart below suggests a correlation between the two, which does seem intuitive.

Looking at this relationship over the past decade, the US equity market (represented by the S&P 500 Index) and the Conference Board Consumer Confidence Index appear to have moved together, advancing in a relatively similar path through mid-2019.  But, since the latter half of 2019, divergences have begun to appear.  Most obviously the post-March rebound in the stock market has not been accompanied with a similar rebound of the consumer’s confidence.  And given the events of 2020, caution from the consumer is certainly understandable.  Yet, the markets’ confidence in the policy-makers ability to navigate the storm has outpaced that of the consumer. 

History suggests that the path of these two items would converge once again, most preferably with the consumer regaining their pre-pandemic confidence.

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