Why Trump contracting Covid-19 may not be so bad for stocks

It is a tradition in the US for investors and the media to keep an eye out for "October Surprises" - those which could permanently shift the direction of the US elections in November. There is little surprise that in 2020, a big surprise arrived on the very first day of October with the president confirming that he and first lady Melania have contracted Covid-19 just a few hours after a positive test came back for his close aid Hope Hicks.

Futures immediately entered negative territory on the news and the sentiment continued through the trading day with the S&P closing down -0.96% and Nasdaq -2.22%.

Investors now fear that Trump catching the virus may further cloud the outlook on an already uncertain election, as well as it being a reminder that the virus is far from contained and poses the single greatest threat to not only the election, but the economy and corporate earnings.

As high profile as the president may be, calls from some that this will be a wake up call to many Americans as to how prevalent the virus remains, and the negative resulting impact on the travel and leisure sector, are likely overdone. I doubt there are many who would have required Trump to become infected to realise that the virus remains very prevalent or that what is just one more case changes consumer habits significantly. However, the news is likely to have knock-on effects, but despite the negative reaction from the market on Friday, these could actually be reasons for the market to move higher.

The one thing the market has been hoping so dearly for in the past few weeks has been an additional round of fiscal stimulus from Congress. That Trump has now tested positive for Covid-19 should now add pressure on Democrats and Republicans to pass another package as the focus returns onto the virus. As Evercore ISI's Sarah Bianchi notes, Nancy Pelosi also has "more leeway to worry less about the election implications of passing a bill".

Bianchi also states that the positive test increases the chances of a Democratic sweep given the renewed focus on Covid-19 - something that would support equities if the outlook of a Democratic victory becomes increasingly likely given how it would minimise election uncertainty. The market also appears to be more hopeful on the impact of a Democratic victory with the result of a recent RBC poll showing the number of 'Biden Bears' in September fell sharply, in part due to his softer stance on trade relations.

However, although Trump stole the headlines yesterday, there was also the key release of the final jobs number before the election. The number missed expectations with 661,000 jobs added in the month vs 870,000 expected, and raises further questions as to the strength and pace of the recovery. The weak data shows that the US is not out the woods yet and the US economy may still flatline - something US Policy Strategist Greg Valliere reckons could further aid stimulus talks as Trump does not want a weak economic outlook overshadowing him as Americans head to the polls.

Even if the positive test is not a reason to believe fiscal stimulus could be here sooner than expected, Jefferies Global Equity Strategist Sean Derby notes that "investors should not panic over the news" given other global leaders including Boris Johnson had also tested positive and the event was not a tail risk.

Whether Trump's infection means stimulus arrives before the election or not, economic data in the US is largely moving in the right direction, financial conditions remain loose, and we appear to be closing in on a vaccine. Add the dearth of attractive opportunities in bonds and elsewhere in the market, and the pullback suddenly looks another opportune moment to add further risk to equities.