Investors are finding more than enough good reasons to shed stocks at the moment. Economic stimulus talks in Washington, D.C., are seemingly going nowhere. The presidential election is surrounded by uncertainty. New coronavirus cases have surged back to new record levels across the U.S. and around the world, setting the stage for another round of shutdowns. There's a lot not to like.
The funny thing about worst-case scenarios is, they rarely actually come to fruition. Most of the time, the market is rather boring. Right now is clearly an exception to the norm, but largely lost in the noise is that the economy is on a reasonably firm growth footing -- and therefore, the stock market is too.
Economy on the mend
October on Wall Street started on the right foot. Building on the bullish reversal that took shape in late September, the S&P 500 had logged a month-to-date gain of 5.5% as of Oct. 12.
Then it all came crashing down. Led lower by stalwarts like Microsoft (NASDAQ: MSFT) and Mastercard (NYSE: MA), the index fell nearly 8% from its mid-October peak. The S&P 500 added to its September loss of 3.9% and now sits more than 9% below its early September high.
But don't let fear steer you clear of what's ultimately an opportunity. There's still a lot going for the market.
One of these things is the U.S. economy. In spite of its obvious challenges, it's still in decent shape. Though gross domestic product fell by 31.4% (on an annualized basis) in the second quarter as most states shut down all but essential businesses and services in an attempt to stem the pandemic, the third quarter's first estimate suggests the nation's GDP grew by 33.1% in the period (again, on an annualized basis). While the country's unemployment rate remained uncomfortably high at 7.9% in September, that's roughly half the unemployment rate being reported in April. Further, initial unemployment claims last week were at their lowest levels since before the pandemic took hold.
Companies are recovering too. The S&P 500's second-quarter earnings plunged on average 33%, and according to the projections, third-quarter earnings will be down year over year too -- but not by as much. Profits are only expected to be down 16% year over year, and up 25% from Q2. Perhaps more important, analysts are collectively modeling a full recovery by the end of next year, which would lead to another record-breaking earnings figure for the S&P 500 in 2021.
More bark than bite
While the backdrop is healthier than it's getting credit for, there's no denying the reasons why investors have been pessimistic.
Looming large among those reasons is the presidential election. In this unusually polarized period, many Republicans believe only President Donald Trump can salvage the damaged economy, while Democrats believe only former Vice President Joe Biden can save it. Given the uncertainty regarding the election's outcome, many investors seem to be playing it safe by adjusting their total exposure to the market. That's understandable.
Except those stances overlook two key realities about the nation's and the world's present situation. One is that both candidates would likely pull out all the stops early in the coming presidential term to shore up the U.S. economy. The other is that while governmental intervention may be able to amplify or accelerate recovery, capitalism is a self-healing system that doesn't necessarily need help.
Then of course there's COVID-19. Not only has it not gone away, new cases in the U.S. soared to record-breaking levels in October. Shutdowns are being reimposed in other countries, and states could find it necessary to start closing nonessential businesses here too. Another period of widespread closures could prove devastating for the national and global economies.
Conditions are different now than they were this spring, however. Then, we didn't fully understand the coronavirus and were ill-equipped to deal with it. Now, we've got eight months' worth of practice and preparation to lean on. That's not to suggest new shutdowns won't hurt. It is to say, however, they won't hurt nearly as much now that the world is ready for them.
This will be the case regardless of who the next U.S. president is.
It's admittedly not easy being an optimist here. Stepping into new stock positions feels tantamount to catching a falling knife, and to be fair, there's room for more downside.
Headlines may have gotten the better of investors at this moment though. A little skepticism followed by some due diligence can be healthy, but this recent sell-off is rooted in more than just healthy skepticism. Too many investors are fearing the absolute worst, blinded to what's working in the stock market's favor. That's often when the best opportunities quietly present themselves to those willing to look for them.