Capital Wave Forecast: Trouble is Brewing as We Close in On the Election

Shah Gilani|October 26, 2020

Last week, the Dow ended the week down 0.9%. The S&P ended down 0.5%. The Nasdaq Composite fell 1.1%.

Very much in line with what your Capital Wave Forecast predicted the week before.

This week, we’re likely to see more of the same, maybe a lot more selling, but not because of company metrics or market conditions. Rather, it may be because of the election next week, and we may feel the effects for the week after, and maybe the week after that.

Get it?

There might be trouble ahead, but the grass is still green out there.

Here’s what to look forward to as we close in on Election Day…

Be Cautious

Earnings, generally, have been fantastic.

According to FactSet, with 135 (or 27%) of S&P 500 companies reporting so far, 84% have beaten analysts’ Q3 earnings estimates (that ties the record set in Q2 2020), and they’ve beaten them by a record shattering 17.2%; that’s five times the long-term average of 3.5%.

Revenues have come in at record-beat levels, too; an astonishing 81% of reporting companies have beat revenue expectations by a record 3.1%.

Interestingly, analysts aren’t raising Q4 estimates. Maybe they’re afraid the good numbers in Q3 are the result of pulling forward future sales. While that may be, it sets up Q4 to be a winning earnings quarter if beats continue against ho-hum expectations.

That comports with your Capital Wave Forecast‘s positive long-term outlook and that pullbacks are a buying opportunity.

The 10-year Treasury yield rose (prices fell) last week, while the spread of high-grade investment corporates and junk corporates over comparable “risk-free” Treasuries both narrowed (prices rose) to their lowest levels since March.

The narrowing of spreads is a bullish trend that says investors believe rates are staying low and corporations are likely to maintain debt service. And if the economy is rebounding robustly, more investors will be more comfortable chasing yield in high grade and high yield bonds.

The 10-year Treasury yield rising is a net positive for equities, too. Rising yields on Treasuries says there’s no rush into safe-haven bonds, that better-than-expected economic growth will put upward pressure on rates.

Again, all that comports with our long-term view that equities have a lot more upside.

Just maybe not right now.

Not the Time to Take Risks

Equities have been rallying on the prospect of a “blue wave” and what that means for stimulus if a Biden administration and Democrat-controlled Congress is calling the shots, and what that would mean for infrastructure spending, healthcare spending, and spending, spending, spending.

But polls being what they are (worthless in 2016), Joe Biden’s lead is dwindling. That narrowing lead reminds investors of the Trump victory in 2016, when polls said, “no way.”

Not that a Trump victory would be bad for the stock market, but a contested election would be.

With a week to go before stuff possibly hits the fan, investors are likely to take to the sidelines, if not take some of their profits with them.

And, with virus spikes slowing down some cities and locking down others, investors are increasingly nervous about consumption and production.

This week’s not one to be taking on more risk. It’s time to batten down the hatches, maybe take some profits, and definitely put on some downside protection and plays.

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So as we navigate these turbulent markets, and hope that next week goes smoothly, I highly recommend you don’t take this opportunity lightly.

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Sincerely,

Shah