Stocks start to crack - Why the crack could become a crevice...

In a recent post I wrote on the risks posed to rotating into value stocks from growth and tech stocks that are positioned to deal much better with the pandemic arguing that as we are not out the woods yet and a prolonged outperformance of cyclical stocks looked uncertain. The sell off yesterday however provided investors with no safe place to hide - whether it be value, growth or momentum, all were in the red. Gold and silver continued their descent as the dollar closed in on a 2-month high.

There was no singular reason for yesterday's sell-off but more a growing concern on Covid cases, the election and hopes of added stimulus. In terms of Covid, although cases haven't been rising significantly in the US, the numbers remain elevated. However in Europe - in particular the UK and Spain - there are vast increases in new cases showcasing further the difficulties of keeping the virus at bay. Trump last night commented that he wouldn't permit to a peaceful transfer of power which further adds to investor jitters but it is stimulus that the market is really fretting over - and it looks like the wait may be longer than anticipated.

Fed Chair Jerome Powell highlighted the need for fiscal stimulus during his congressional testimony and it appears that both democrats and republicans seem happy to wait until after the election to get a bill passed - Wells Fargo has assigned a 25% probability that a stimulus bill will be passed before the election whilst Evercore see that "fiscal stimulus is all but dead". Given this deadlock Goldman have halved their outlook for Q4 GDP growth to 3% from 6%.

It is difficult to argue that the risks lie to the upside for stocks in the near term. The catalyst candidates: a vaccine, a stimulus bill and an improvement in Covid cases - look increasingly further out of reach. Yes, the macro outlook for equities remains positive long-term given low rates and negligible returns on other assets including bonds, but there are few investors now who believe we are beyond the worst of it. Investors who have been waiting for a more attractive entry-point following the summer rally may very soon get their chance.