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October 26, 2020

3 reasons markets could be in for a bumpy week

Photo | CNN Business

Investors trying to decide how to place their bets heading into the last two months of the year face a daunting task.

Between the imminent US election, an alarming rise in Covid-19 cases and a spate of quarterly results due this week from some of the world's top companies, there's no shortage of data to parse.

The election: We're eight days out from Election Day in the United States. Investors have priced in a victory for Joe Biden, with prediction markets putting the odds of a win for the former vice president at 63%.

But some on Wall Street warn that markets aren't perfect crystal balls. "It's not over until it's over," cautioned Nicholas Colas, co-founder of DataTrek Research, in a recent note.

Investors are now counting on a new economic stimulus deal to be pushed through shortly after the election. But that will depend in large part on the outcome. If Trump enters a lame duck period, it could be hard to forge an agreement before a transition of power takes place next year.

Covid-19: Coronavirus cases are surging again in the United States and Europe. While investors continue to set their sights on a vaccine, fresh restrictions on movement and businesses have the potential to halt the nascent economic recovery, muddying the outlook.

The United States hit a record seven-day average of new Covid-19 cases last week, logging more than 83,000 new infections on both Friday and Saturday. Experts will know by early December whether a potential coronavirus vaccine is safe and effective, but there probably won't be widespread availability until later next year, Dr. Anthony Fauci, the top US infectious disease expert, said Sunday.

In Europe, the situation is escalating rapidly. Italy will impose a 6 p.m. curfew on bars and restaurants Monday after cases rose by more than 21,200 on Sunday, a new daily high since the start of the pandemic.

"The second wave of the virus and new restrictive measures risk putting the eurozone recovery into reverse," ING economists told clients Monday.

Tech earnings: Both election jitters and the trajectory of the pandemic could send stocks lower this week. But the biggest US companies — including Microsoft, Google parent Alphabet, Facebook, Apple and Amazon — are also due to report earnings.

If they handily beat Wall Street's expectations, as they have in the past, shares could rocket, supporting the broader market.

Watch this space: The push and pull of these factors has investors bracing for turbulence. The VIX, a measure of the S&P 500's volatility, rose nearly 8% on Monday to its highest level since early September.

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