Market Challenges: US Elections, Virus and Key US Economic Data

The stock market faces two challenges near term -- the US elections and the resurgence of the coronavirus.  There are a number of conceivable paths for the market depending on the elections' outcome.  The significance of the virus' resurgence could lessen if a successful vaccine is announced.

Regarding the elections, the first issue will be whether the results are clear cut on November 3.  A clear victor of the presidency could trigger a relief rally.  In contrast, the market may sell off sharply in the absence of a clear winner -- with one caveat discussed below.   The market would likely remain under pressure until the election results are resolved.

Whether Trump or Biden wins will make a difference for the market.  A Trump victory would likely be viewed positively, given his pro-growth policy stance.  A Biden victory would likely be viewed conditionally on whether Republicans control at least one of the Congressional branches.  By standing in the way of a full-blown passage of Biden policies, Republican retention of the Senate would mitigate any negative market reaction to his win if not prompt a relief market rally.  It also could prompt a relief rally if the presidential election is not clear cut.  In contrast, if control of the Senate looks to being passed to the Democrats, the market may sell off even if the presidential election is not decided.  And, if Trump is the victor, there is sure to be market talk of another impeachment attempt down the road, putting a damper on any rally.

Any relief rally in the case of a Biden victory may very well be short-lived, however.  There is a risk of heavy year-end profit-taking in anticipation of higher capital gains taxation under his administration.  The market could turn down sharply later in November and into December.

The market's evolution subsequent to the elections may depend on whether a successful vaccine against the virus is announced.  A vaccine should lead to a further pickup in economic growth next year regardless of who wins the presidency.  So, a sell-off on a Biden victory could end later in November if approval of a vaccine is announced then.  Or year-end profit-taking could be restrained.  

The US economy's current strength is likely to be seen in this week's key US economic data.  Consensus looks for an uptick in the Mfg ISM to 55.8 in October from 55.4 in September.  The Markit Mfg PMI inched up in the flash report, in line with consensus.  The Phil Fed Mfg Index jumped, suggesting upside risk.  Consensus looks for +600k m/m October Nonfarm Payrolls (versus +661k in September) and a dip in the Unemployment Rate to 7.6% from 7.9%.  Census workers should subtract about 145k from Payrolls, after subtracting about 30k in September.  But, the Claims data suggest the risk is for stronger-than-consensus Payroll and Unemployment Rate prints.