Coronavirus Isn’t the Only Headwind for Stocks -- ICYMI

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Those who think the eradication of the coronavirus will usher in more than a year of strong revenue and earnings comparable have another thing coming.

The U.S. stock market corrected last week, falling more than 14% from its all-time high hit in February. Stocks have bounced a bit since then, although continued uncertainty over the Coronavirus and bearishness on the effectiveness of interest rate cuts have all weighed on sentiment.

But right when stocks are seemingly scheduled to rebound — the second half of 2020 — is around the time that another headwind could pressure sentiment yet again.

That’s the U.S. Presidential election.

In fact, Columbia Threadneedle Investments lowered its position in global stocks to neutral from overweight, citing election risk as a major factor that will rain on the market’s parade in 2020.

“Even after the coronavirus news flow stabilizes, we expect inverts to start looking ahead to the outcome of the U.S. presidential election and its market implications,” the firm wrote in a note. “Having policy level allocations to risky assets is our preferred course of action.”

The firm takes this position even as central banks cut interest rates to the point that stocks are incredibly attractive now. Even though consensus earnings per share estimates on the S&P 500 for 2020 have fallen to $175 from $178, the equity risk premium has risen far above historical averages.

That premium is the excess expected return on stocks when compared to the rate of return on safe 10-year treasury bonds. That yield is at 0.91%, the lowest level in modern American history.

The risk premium is currently just under 5%, compared to historical averages of around 3%. This means stock prices have fallen. Barring a recession, a lower risk premium — or higher stock prices — may be appropriate.

But what if Bernie Sanders wins?

Sanders’ ambitions government spending plans likely requires higher corporate taxes, which would bring earnings way down. Of course, we’ll have to see how evenly Democrats and Republicans are distributed in Congress, which will impact the magnitude of Sanders’ policy regime change and therefore the tax regime change.

But if Tuesday’s market run-up is any indication, sentiment will be pressured in 2020 by a potential Sanders victory. Joe Biden showed strength in Super Tuesday results, powering sentiment.

Regardless of election outcomes, sentiment will be pressured. 

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