Stock Market Forecast: Expect Turbulence Amid Election 2020, Coronavirus Vaccine Hopes

The market is once again in a confirmed uptrend, but the stock market forecast is anything but clear. President Donald Trump testing positive for the coronavirus may only be the first of multiple October surprises for Wall Street.

Investors riding the historic Stock Market Today Live rally from the coronavirus crash bottom on March 23 to record highs in early September pushed a few concerns to the background. The unraveling U.S.-China trade detente. Looming antitrust action against FANG stock stalwarts Alphabet (GOOGL) and Facebook (FB). A possible fall coronavirus wave. A lapse in fiscal stimulus. A potential Democratic sweep in Election 2020 that promises big tax hikes for corporate profits and investment gains. A drawn-out vote-counting process that jolts stocks like the 2000 hanging-chad election.

Now, all those worries may come to the fore in a matter of weeks. Expect more stock market turbulence. "Uncertainty has rarely been higher for financial markets," Morgan Stanley chief U.S. equity strategist Michael Wilson wrote this week. He sees the S&P 500 and Nasdaq 100 at risk of falling to their 200-day moving averages before the next stage of the bull market resumes.

Hopeful Signs In Stock Market Forecast

Yet the stock market outlook isn't all grim. Three big stabilizing forces should prevent a prolonged slump. Steadying confidence that a coronavirus vaccine is within reach. A government spending tailwind — once fiscal policy gets through a preelection air pocket. Federal Reserve asset purchases also should provide support, especially with policymakers committed to stimulate above-2% inflation for an extended period.

Michael Arone, chief investment strategist at State Street Global Advisors, anticipates volatility until the 2020 election winner is clear. But going forward, he has a sunnier stock market forecast. "Once we get resolution, the outlook for stocks will remain positive," he told IBD. "You still have negative real interest rates. That's going to support asset prices and valuations. And we are going to get another massive fiscal policy package under either candidate."

Those factors help explain why Ed Yardeni, chief investment strategist at Yardeni Stock Market News Research, is keeping an upbeat market outlook, regardless of who wins the high-stakes election. His stock market forecast sees the S&P 500 rising to 3500 by year-end and 3800 by the end of 2021.

"The stock market is likely to do better if the election delivers two more years of gridlock no matter who wins the White House," Yardeni wrote this week. A Democratic sweep that ushers in "radical regime change and a shift to the left will have consequences" for stock prices, he told IBD.

Yet "the policies are going to be (highly) stimulative, rather than policies that cause a recession," Yardeni said. Meanwhile, revved-up fiscal policy will put the onus on the Federal Reserve to keep up its asset purchases to hold down long-term rates, Yardeni says. "We've crossed into the Twilight Zone of Modern Monetary Theory," which holds that deficits don't matter — unless and until inflation gets uncomfortably high.

He expects Fed efforts to hold the 10-year Treasury yield at 1% or lower in the near term. The Fed's suppression of long-term rates will be bullish for the stock market forecast. The policy will make safe Treasury returns pale by comparison and raise the discounted value of long-term earnings growth. Still, the immediate stock market reaction to a Joe Biden presidency and Democratic Congress might be to sell.

Biden Tax Hikes On Profits, Capital Gains

Joe Biden has proposed hiking the long-term capital gains tax rate to 39.6% from 23.8% for million-dollar earners. Tax On Capital Gains expects a flurry of selling of profitable positions. Tax selling happened before far more modest cap-gains tax hikes took effect in 1987 and 2012.

Overall, Biden's proposed tax hikes amount to $4 trillion over a decade, according to the Tax Policy Center. The plan includes hiking the statutory corporate tax rate to 28% from 21%; doubling the tax on profits of foreign subsidiaries to 21%; and establishing a 15% corporate minimum tax aimed at companies, like Amazon.com (AMZN), whose tax breaks largely erase tax liability.

Goldman Sachs has estimated that the proposals, Capital Gains Tax On Stocks if implemented, could knock 12%, or $20 per share, off 2021 S&P 500 earnings. Yet other Biden proposals to increase federal spending would provide somewhat of an offsetting boost.

A Biden presidency might be good news for hospitals and health insurers by broadening Affordable Care Act subsidies and resolving the latest constitutional challenge.

Election 2020 Stock Winners, Losers

Managed care providers and drugmakers could be pressured by Biden's proposed Medicare public option and prescription price curbs. However, expanded insurance coverage and a likely increase in coronavirus testing bodes well for biotech and health care equipment stocks, says State Street's Arone. He also sees clean energy and infrastructure as winners in a Biden presidency, boosted by more government support.

Notably, hospitals managed care and solar stocks were key winners on the market's Sept. 30 follow-through day, just after the first presidential debate.

A Trump victory would give a lift to fossil fuel energy stocks, defense companies and financials. Hightower Advisors figures the initial difference between a status-quo election and a Democratic sweep would be a range of 5%-10% for the stock market. A Donald Trump reelection would spark a stock market rally of up to 5%, while a Biden victory and Democratic control of Congress could trigger up to a 5% sell-off.

Senate Control Influences Stock Market Forecast

If Biden wins, the stock market will take its cue from the outcome of the Senate battle. Stock Market Forecast Next Week Currently, the RealClearPolitics polling average shows Democrats picking up four seats, which would give Biden a 51-49 majority. The most positive stock market outlook scenario might be a net Democratic pickup of two seats. That would still leave Biden one short of a majority needed to push through big tax hikes and progressive reforms. Yet independent-minded Alaska Sen. Lisa Murkowski would probably deprive the GOP of a majority committed to fiscal conservatism.

Biden appears to have an edge, though his lead narrowed in the latest IBD/TIPP Poll. If the presidential race tightens considerably, Wall Street will be on guard for a nail-biter finish, with possible recounts and a court fight.

Trump's coronavirus diagnosis is sure to disrupt the final month of the campaign. He's set to be in quarantine for the next several days, canceling campaign events.

The 2000 postelection legal fight went on for five weeks and saw the S&P 500 fall as much 9.6%. That drop, however, probably overstates the impact on stock market psychology. At the time, Wall Street was in the early stages of the 2000-2002 bear market after the dot-com bubble.

Stock Market Forecast In Post-Coronavirus World

Vladimir Putin's Aug. 11 announcement that Russia approved a coronavirus vaccine was pilloried by the scientific community. Yet Wall Street may have offered a preview of how the Stock Market Predictions Post Covid may react to a credible breakthrough. The Nasdaq's 1.8% slide led the market lower as the S&P 500 pulled back a more moderate 0.8%. The take-away: A return to normalcy may not be great news for tech stocks.

The tech sector, utilities and health care were the only industries to see positive earnings growth in Q2, as overall S&P 500 earnings dived 32%, wrote LPL Financial chief equity strategist Jeffrey Buchbinder.

"In a year, we may not be setting up as many home offices or buying so many devices for kids to learn remotely," Buchbinder wrote. "If this causes earnings momentum in the sector to fade, technology stocks could be used as a source of funds to move into cyclical value stocks that have lagged."

"Prepare to pivot from the 'Pandemic trade' to the 'Reopening trade,' " BCA Research advised clients in a Sept. 29 strategy outlook. "Vaccine optimism should pave the way for cyclicals to outperform defensives, international stocks to outperform their U.S. peers, and for value to outperform growth."

The next big date for Covid vaccine progress is expected in late October, when Pfizer (PFE) says it will have results for its pivotal Phase III trial. Moderna (MRNA) data is expected in November. AstraZeneca (AZN) and Johnson & Johnson (JNJ) coronavirus vaccine data could soon follow.

Will all that news set up tech stocks for further selling? Possibly, but the recent Nasdaq correction already has reversed some excess bullishness. Buchbinder wrote on Sept. 28 that he saw the 13% pullback Stock Market Predictions Post Brexit as a buying opportunity for long-term growth tied to cloud computing and e-commerce. Meanwhile, the mid-October release of the iPhone 12, the first Apple (AAPL) 5G iPhone, and the Q3 tech earnings parade may serve as catalysts for a tech-stock rally.

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