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S&P 500 Weighed by Stimulus Uncertainty Amid Virus Resurgence

S&P 500 Weighed by Stimulus Uncertainty Amid Virus Resurgence

2020-11-21 09:00:00
Margaret Yang, CFA, Strategist
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S&P 500 Chart

Chart created with TradingView

S&P 500 FUNDAMENTAL FORECAST: BEARISH

  • The S&P 500 index may retrace further amid a Treasury-Fed spat while Covid-19 is taking a toll on the jobs market
  • US weekly jobless claims climbed for the first time in five weeks, reflecting weaker sentiment
  • Trading at 27.9 times price-to-earnings (P/E) ratio, the index’s valuation appears to be stretched
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The global economy is heading towards an uneven road of recovery next year, according to the IMF’s latest forecasts. In the US and Euro Area, where the pandemic is resurging at an alarming pace, growth momentum is likely to slow down in the winter as more stringent and wider lockdown measures dent a fragile recovery. The good news is positive development on the vaccines front, with several large pharmaceutical firms moving closer to get regulatory approval for emergency-use authorization after their final clinical trial results showed impressive success rates. The critical question about how durable the vaccines are, however, has yet to be addressed.

The IMF projected a historic global GDP contraction of 4.4 percent in 2020, followed by a 5.2 percent expansion in 2021. The organization also advocated for stronger policy action to combat growth uncertainty, in view of several headwinds including virus-related travel restrictions, potential hurdles for manufacturing and distribution of vaccines in large quantity and persisting social distancing measures. More than 2 million coronavirus cases were reported in the US over the past 14 days, marking a record high.

Last Thursday, Treasury Secretary Steven Mnuchinsaid that he won’t extend several emergency lending programs, which were run by the Federal Reserve, beyond this year. The Treasury Department also asked the Fed to return unused funds, which could prevent the incoming administration of President Elect Biden from restarting the lending facilities early next year. This could serve as a negative catalyst for the S&P 500 index and risk assets in general, against the backdrop of a tepid growth outlook and prevailing pandemic risks. In the meantime, the second US relief package appears to have stalled after the presidential election, and is unlikely to be pushed through until Mr Biden takes the White House in late January.

The lack of clarity on stimulus plans amid rapidly climbing coronavirus infections in the US may contribute to further weakness in the S&P 500 index, which has already come off its all-time high.

Fed Balance Sheet vs. S&P 500 Index – 12 Months

Fed balance sheet

Source: Bloomberg, DailyFX

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The US job market appears to show early signs of weakness too, as lockdown measures seem to take a toll on hiring. Weekly US initial jobless claimsregistered at 742k in the week ending November 13th, compared to 711k in the week before. The reading also came above market expectations of a 707k increase, marking the first pickup in five weeks.

US Weekly Initial Jobless Claims

Weekly jobless claims

The S&P 500 index is trading at a 27.9 times price-to-earnings (P/E) ratio, which is above its five-year average of 20.3. Rich valuation may render the index vulnerable to short-term pullbacks, especially if markets start to price in a slower pace of growth into next year.

A sectoral rotation catalyzed by vaccine optimism took center stage in early November, as investors reshuffled their portfolio into cyclical energy, industrial and financial sectors at the expense of technology. This trend could reverse, however, if new outbreaks result in broader and stricter lockdown measures or the distribution of vaccines is delayed.

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--- Written by Margaret Yang, Strategist for DailyFX.com

To contact Margaret, use the Comments section below or @margaretyjy on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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