Investor Optimism Reigns Despite Trump’s Diagnosis, Political Volatility Ahead

October 6, 2020 Updated: October 6, 2020

WASHINGTON—Stocks have remained surprisingly resilient in the wake of President Donald Trump’s COVID-19 infection, which sent shock waves through global markets last week.

Stock investors are tuning out daily noise from Washington, amid rising political volatility in the run-up to the November election, according to Ed Yardeni, a veteran Wall Street strategist and president of Yardeni Research.

“Investors are increasingly concluding that the noise itself doesn’t really provide any useful investment information,” he told The Epoch Times.

Just four weeks before the election, the president’s sudden diagnosis and hospitalization added more uncertainty to financial markets, triggering an initial market sell-off. Global stock markets fell on Oct. 2 after Trump’s positive test, but rebounded at the start of the week as improvement in his health eased some of the uncertainty.

Trump’s diagnosis is a “head-spinning new development in a head-spinning year,” according to Yardeni.

The development will cause Trump to miss key campaign events, which may add to election uncertainty and market volatility in the coming weeks.

“You would think that the market, as a result, would be volatile and maybe more to the downside than the upside, but it looks as though September’s downside could very well lead to October’s upside,” Yardeni said.

“Investors learned in September that if you get out of the market, you wind up putting your money in fixed-income securities earning zero, that’s not a very attractive alternative to stocks,” he added.

The U.S. stock market has recovered quickly from recent setbacks as zero interest rates are forcing investors to prefer stocks over bonds and to focus more on the long-term rather than the short-term.

Economic Recovery

Nearly half of registered voters said they were more worried about the economy after Trump’s diagnosis, according to Morning Consult/Politico polls conducted on Oct. 2–3. Thirty-eight percent of respondents said the development didn’t change their view on the matter, and only 6 percent said they were less worried about the economy.

“I think a reasonable case could be made that no matter who wins in the White House, no matter what happens in Washington, the economy will perform reasonably well in 2021 and 2022,” Yardeni said, adding that the economy has shown continued V-shaped recovery.

The U.S. economy is positioned to grow more than 30 percent in the third quarter (from July through September), stronger than anticipated previously.

The Atlanta Fed’s GDPNow model showed on Oct. 6 that the gross domestic product (GDP) in the third quarter would grow by 35.3 percent, a record jump following the record 31.4 percent contraction during the second quarter. The Atlanta Fed revised its forecast following the recent positive economic releases.

Last week’s jobs report showed that U.S. employers added 661,000 new jobs in September and the unemployment rate fell to 7.9 percent. The economy has recovered about 50 percent of the jobs that were lost during the lockdowns.

Consumer confidence also rebounded in September, posting the biggest gain in 17 years. Consumers expressed optimism about the outlook for the economy and job market.

The U.S. service sector is also showing good signs of recovery. The sector continued to expand in September with the ISM Services Index rising to 57.8. This is the fourth consecutive month of expanding activity in the service sector after sharp contractions during the pandemic shutdowns in April and May. The expansion was largely driven by new orders and employment.

Besides economic data, news around a stimulus deal in Washington also caused market swings.

As of Oct. 6, analysts don’t expect to see any major breakthrough on a substantial fiscal package before the November election.

“This raises some risks to the near-term trajectory of consumer spending and is one reason we are less than sanguine on current quarter real GDP growth,” Brett Ryan, senior U.S. economist at Deutsche Bank, said in a report.

Stocks turned negative on Oct. 6 after Trump announced on Twitter that he called off stimulus negotiations with Democrats “until after the election.”

Risks of a Disputed Election

While the economy continues to recover, the attention of many investors has turned toward the November election. Investors are growing more concerned about the risk of a disputed U.S. presidential election and a potential period of market volatility.

In a note to clients, asset management firm Northern Trust warned about potential increases in “election-driven market volatility” following Trump’s diagnosis.

However, the cost of hedging against the volatility risk has risen in recent weeks. The 2020 election is currently the most-expensive event risk on record, according to Bloomberg.

Financial markets “are increasingly hedging the potential for volatility around the election, likely tied to the potential for an uncertain outcome and resulting litigation,” James McDonald, chief investment strategist at Northern Trust, wrote.

“One way to measure this is through futures prices tied to volatility. VIX volatility futures have risen in the last six weeks from a current level of 25 to an expected volatility level of 32 in November—with a subsequent decline in the ensuing months,” he added.

McDonald also noted that the contest over the presidential election between George W. Bush and Al Gore, which was settled by a Supreme Court decision, “led to a five-week period of stock market weakness.”

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