What Trump’s COVID-19 diagnosis means for the stock market - October 09, 2020

What Trump’s COVID-19 diagnosis means for the stock market

With over 35 millions cases and over 1 million deaths worldwide, the COVID-19 pandemic has dramatically affected the global economy and obviously the stock markets. United States are in the lead with more than 7.5 millions of cases and over 200 thousand deaths. Several leading figures in global politics have been among people infected, here are some of the cases: Prince Albert II of Monaco, UK prime minister Boris Johnson, prime minister of Russia Mikhail Mishustin, president of Brazil Jair Bolsonaro, French finance minister Bruno Le Maire, former president of India Pranab Mukherjee. Donald Trump joins the list of leading politicians who contracted coronavirus, First Lady Melania Trump has tested positive as well. What does that mean for the stock markets?

Donald Trump announced early on Friday (October 2), less than 5 weeks before the Election Day, that he and the First Lady had contracted the coronavirus. Both of them immediately began quarantine, which prevented Trump from further campaigning.

On Friday, Wall Street’s main indexes opened lower driven by the news of Trump’s diagnosis: S&P 500 lost 1.24%, NASDAQ Composite dropped 2.15%, Dow Jones Industrial Average fell 1.01%. A slowdown in the US economic recovery affected the market as well. CBOE Volatility Index, which is often referred to as the fear index or fear gauge, opened 8% higher. After plunging on uncertainty over Trump’s COVID-19 test, stocks partially recovered during the day.

President Trump’s diagnosis added even more uncertainty to the markets, put focus on a possibility of a second COVID-19 wave and raised fears of a slower reopening. Some investors are worried, that a serious worsening in Trump’s health less than a month before the Election Day could affect the stock market that just finished its worst month since March. 

As Reuters puts it, should uncertainty persist, technology and momentum stocks that have led this year’s rally may be particularly vulnerable to a selloff, some investors said. “If people ... get nervous right now, probably it manifests itself in crowded trades like tech and mega-cap being unwound a bit,” Willie Delwiche, investment strategist at Baird, told Reuters.

However, many analysts believe the Friday selloff was rather a knee-jerk reaction. According to MarketWatch, Jefferies analyst Sean Darby said that investors should not be panicking about Trump’s diagnosis and believes some of the selling in the stock market, which was staging a mini recovery at midday Friday, is overdone. The moves of U.S. 10 Year Treasury Note and gold price imply that there is no significant flow to safe havens.

In the meanwhile, there have been several rather sharp movements on the markets after the news of Trump’s illness (see a chart below): stocks reacted positively to improvement in President Trump’s recovery from coronavirus over the weekend and were supported by the hope for a new fiscal stimulus, then dropped as Trump ordered to stop the stimulus negotiations until after the election, and have rebounded after he said he was open to a number of independent fiscal stimulus measures. 

Uncertainties related to the elections, a second COVID-19 wave, and a slowdown in US economic recovery will affect the market movements in the upcoming weeks. In times like this, patience is a virtue for investors. Additionally, a well diversified and professionally managed portfolio is a good choice that will help investors achieve their long-term return goals. As MarketWatch puts it, Michael Pompian, an expert on behavioral finance at Sunpointe Investment, notes that investors should resist the urge to change their tactics due to politics because it rarely has a long-term impact on their returns.

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.