by Timothy D. Carkin, CAIA, CMT
Senior Vice President
Assumed to be postulated by Aristotle, “horror vacui” roughly translates to “nature abhors a vacuum.” The financial market equivalent would be “horror incertae,” or “markets abhor uncertainty.” While the pandemic and the election season have brought more than their fair share of anxiety, the markets, by their nature, discount many possible outcomes and their probabilities in an effort to avoid “incertae.” This is evident in recent stock market and interest rate volatility. Equity markets swung nearly 13 percent from low-to-high in the last two weeks and not to be outdone, 10-year U.S. Treasuries moved 13 basis points in one day.
This week marked another major election in the U.S. and, as of this writing, the winner of the presidential race has yet to be declared. While some might look to the market and expect turbulence, there was some measure of certainty on Election Day for the Senate and House of Representatives races. Knowing the composition of the government helps us more accurately predict legislative direction and fiscal stimulus, regardless of who sits in the Oval Office. That said, we believe the possibility of a contested presidential election or the outcome of a Georgian Senate run-off election may unnerve the markets and cause some measure of volatility increase.
Though the election has been a grey cloud hanging over the markets, there are glimpses of clearer skies that cannot be overlooked. This week, the Federal Open Market Committee met and indicated it did not plan to change its near-zero policy for at least the next three years. While Chairman Powell did mention that they are investigating changing the quantitative easing (QE) program to increase stimulus, we view the Fed’s “wait and see” policy as a welcome non-event in a very news heavy week.
In brighter news, Friday’s non-farm payroll report surged ahead of expectations, adding 638,0000 jobs. This brought the October unemployment rate to 6.9 percent, down from 7.9 percent a month earlier. The largest gains, an additional 271,000 jobs, were in the pandemic ravaged industries: leisure and hospitality.
Volatility in the markets is dropping post-election but not over. The near-zero Fed Funds interest rate and decreasing unemployment rate should be positives for the future of the economy and thus the markets. Until we can eliminate the uncertainty of the elections and the chance of COVID-19 related lockdowns, volatility will continue to be a concern.
Takeaways for the Week
The markets reacted positively to the elections, rallying 8 percent at its highest this week. This on the back of 5.6 percent decline last week
Remember: “Horror incertae.” The election is not over, and a COVID-19 resurgence will hang over the market until their conclusion