S&P 500: Three critical policy disappointments behind the correction – Morgan Stanley


Last week, the S&P 500 officially entered correction territory, down 10% from its September 2nd peak, while the Nasdaq has fallen even further, down nearly 12%. Lisa Shalett from Morgan Stanley lays out three key catalysts behind the latest swoon in US stocks.

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Key quotes

“A new stimulus bill has stalled. Surprisingly, Senate Republicans have apparently walked away from the possibility of further fiscal stimulus this calendar year. Almost every Wall Street analyst, myself included, had expected another round of spending that would help state and local governments, support key industries and provide aid to small businesses and the unemployed.”

“The Fed has yet to provide further details on how its new plan for ‘average inflation targeting’ would work, or how it will eventually roll back or taper the massive quantitative-easing stimulus programs put in place during the crisis. Instead, the Fed has only confirmed that it will keep the key federal funds rate near zero for at least the next three years. That signaling has contributed to an all-time low in interest-rate volatility and moderately higher long-term yields. One side effect of those higher Treasury yields: Tech stocks, often viewed as higher-risk growth investments that tend to trade at a given premium above the benchmark 10-year Treasury yield, now look even more expensive. That’s likely one reason tech stocks have been hit particularly hard lately.”

“Uncertainty is rising around when the US presidential election will be finalized. Normally, we would advise investors to ignore election-related volatility. However, circumstances surrounding the general election add a layer of uncertainty that we have never encountered before. It is unclear whether finalized results will be known within days, weeks or, through court battles, months.”

 

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