by Bryan Perry

November 10, 2020

With a post-election relief rally underway, there are some weighty issues for the market to contend with that will now become more front and center in the days and weeks ahead.

Third-quarter earnings season delivered a fantastic scorecard of top- and bottom-line results, surpassing even the most optimistic of forecasts. The V-shaped economic recovery showed continued momentum into this quarter on the back of upward guidance by a plethora of leading companies from all sectors.

The fourth quarter is likely to show some rosy economic and corporate earnings data, closing out 2020 in bullish fashion, but it’s the first quarter of 2021 that could provide some resistance to the bullish trend if certain events don’t unfold the right way. They are no secret, and they are converging at the same time.

The most glaring threat is the surge in coronavirus data as the weather turns colder and the likelihood that a vaccine, if even widely accepted by the public, won’t be available for several months. There is a rising sense of urgency as new cases surge to over 100,000 a day with hospitalizations and fatalities also rising.

Nationwide Covid-19 Metrics Charts

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The second concern is that the control of the Senate hangs in the hands of the two special elections to be held in Georgia, where the Republicans hold a very slight edge. However, leading up to the January 5 run-offs, there will be hundreds of millions of dollars spent to push the Democrats to victory, taking the Senate to an evenly split 50-50 count with Vice President-elect Kamala Harris providing the swing vote.

“All eyes will be on Georgia for the next two months,” said Emory University political science professor Andra Gillespie. “There will be record spending, unprecedented campaigning and tons of mudslinging in these races — more than what we’re used to seeing.” A double win by the Democrats would secure a blue wave that will most surely change the course of the current investing landscape.

Thirdly, the notion of further big spending in Washington to lessen the impact of COVID-19 on small business and specific industries, like the airlines, is weighing on the U.S. dollar, whose recent slide is not setting off any alarm bells, but that would not be the case if the Dollar Index (DXY) falls to the 88 level.

United States Dollar Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Most currency watchdogs don’t consider this slide in the greenback to be a major risk to the stock market. They say a weak dollar just helps to boost profits for America’s multi-national corporations, which is true, but a weaker dollar that only gets weaker will drive the cost of foreign-made goods higher, which will be passed on to consumers in the form of rising inflation. It also pressures Treasury yields higher to satisfy buyers of debt, when the underlying currency is in decline, driving up the cost of servicing that debt. At the present, this is not a major talking point among the financial media, but it is well worth monitoring.

If this weak dollar scenario becomes a more vital consideration, then the role of the Federal Reserve becomes significant. When a decision is made to support the dollar’s price against another currency, the foreign exchange trading desk of the New York Fed buys dollars and sells the foreign currency; conversely, to reduce the value of the dollar, it sells dollars and buys the foreign currency.

Fed Chairman Jerome Powell has consistently reminded the markets that they have plenty of ammunition to fight deflation, encourage inflation and support King Dollar, if required to do so. The forex (foreign exchange) market is the largest financial market in the world – larger even than the stock market, at $6.6 trillion in daily volume, according to the 2019 Triennial Central Bank Survey of FX and OTC markets.

How much the Fed can really influence the direction of the greenback in a world awash in liquidity hasn’t been tested. This creates an “x-factor” for markets that are not fond of uncertainty and unknown quantities. Again, this is not a red flag, but something to watch if dollar weakness picks up speed.

Average daily turnover in the global foreign exchange market from 1998 to 2019

Global Foreign Exchange Market Average Daily Turnover Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Even though I raise these caution flags, it’s important to note that the market is currently optimistic about such events. There are no fewer than 11 vaccines in Phase 3 clinical trials, and if late-stage signals show that a breakthrough therapy is ready for global distribution, then market perceptions will remain upbeat.

Also, the market currently sees the GOP holding onto the Senate after the January 5 run-offs. It is also the consensus among currency traders that the Fed has the firepower to support the dollar, at least for now.

From this standpoint, it’s not wise to fight the tape, as major fund flows into stocks of late are a strong vote for the bullish scenario. The market is a forward discounting mechanism, so the points I’m raising today, if negative at all, won’t be felt for several months out.

So, in the meantime, enjoy the ride – but don’t be complacent. Be alert for sudden changes.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

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The Hidden Stories Amid Last Week’s Election News

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About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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