On Monday the major indices suffered their biggest losses since early September. But the fall this time looked much different.
Back in September, there was a major rotation taking place out of overheated large-cap technology stocks and into small-caps and value names. There were not any major macro headlines that drove the pullbacks.
The current pullback looks quite different.
Technical and fundamental conditions continue to look quite good. Earnings reports look fairly solid, there is a big chip deal between Advanced Micro Devices (AMD) and Xilinx (XLNX) , and price targets are being raised on stocks such as Square (SQ) . The percentage of S&P 500 companies increasing guidance is at a record high because expectations have been low.
The problem that the market is facing right now is not fundamentals or valuations, it is the news flow. The possibility of fiscal stimulus before the election has probably come to an end, Covid cases continue to rise around the country and in Europe, and the very contentious election is only becoming more contentious.
The problem for investors is that we are heading into a period of great uncertainty until the election is over. The biggest danger is that there may not be a clear winner immediately and it could drag out for weeks. There is likely to be some major stimulus passed after the election, no matter who wins, but the timing will be difficult to anticipate
The dilemma that market players face is to what extent do you dump stocks that you are confident in fundamentally to avoid downside volatility created by political news? Do you sell a "good" stock because you are afraid it may languish as we move through an ugly election cycle?
The answer to that question is going to vary tremendously depending on trading and investing styles. That is why I anticipate very choppy and sloppy action as we move through this period. There will be value buyers taking advantage of dips and pullbacks but there will also be risk-averse market players looking to reduce exposure until some of the uncertainty subsides.
It is a tricky environment and it is important to be very clear about your approach. Don't let inertia take hold. Stay vigilant and focus on protecting capital. You can always buy back something you have sold.
We have a little bounce action Tuesday morning on positive news flow but the election chaos is not going to go away until at least next week.