Ugly election looks set to extend volatility for rest of the year after recent sell-off, says CIO
One constant in 2020 has been volatility – something that doesn’t seem likely to end anytime soon, according to one chief investment officer.
After everything melted higher in August, events caught up to the markets in September as large-cap technology stocks took a hit. The technology-heavy Nasdaq fell 5.67%, giving back almost all the gains made in August.
Greg Taylor, of Purpose Investments, pointed to numerous reasons for the sell-off. It may have been just a give back of the low-volume move from the month prior, although he believes it feels more like investors returned from their summer vacations and faced the fear of a trifecta: a second wave of the virus, the lack of a US fiscal deal and a slowdown in economic growth.
However, Taylor warned that, despite the “historic” recovery since the first-quarter crash, we have also seen a return to the excesses of greed and speculation. Namely, SPACs, where investors give sponsors a blank cheque to do acquisitions.
He said: “This is a bull market activity and not something you see in markets where investors are being rational. At last count, there are over 200 of these SPACs wandering the US looking for acquisition targets to ‘de-SPAC’.
“For every successful SPAC - Virgin Galactic, Draft Kings, etc. - there will be many that fail to get any deals done. As many have made a comparison of the move in the FANG stocks to previous bubbles, watching the performance of these SPACs could be a great signal for the peak of this move.”
The recent sell-off was orderly, he added, and may prove to be a rare healthy correction that provided investors with a buying opportunity. However, September was a busy month for IPOs on the NYSE, which Taylor said was “remarkable” given the current environment.
He explained: “Liquidity has to go somewhere and at the moment the favourite place to deploy capital has been in American equities. The question we all will have to answer is for how long this will last?
“Watching the performance of the U.Ss dollar may give us some clues. Plenty has been written on the decline of the greenback as a safe-haven asset, but it bounced back, up 3% in the month. A strong U.S. dollar can be seen as a negative to many investment sectors - cyclicals, multi-nationals and gold - and a best-case scenario could be a narrow trading range going forward.”
Meanwhile, the U.S. election day awaits on the horizon and the prospect of a contested result will fray nerves.
Taylor said: “Comments coming from both sides are questioning mail-in ballots, possibly setting up for a repeat of the famous hanging-chad recount of the 2000 election. That vote had to be settled in the US Supreme Court and took over five weeks for an answer. Who wants to bet this time will be any different or any quicker? As we all know, markets hate uncertainty and the prospect of this dragging on longer could be even more damaging.”
