Stock markets had been under pressure during the past week, showing that even with massive fiscal and monetary stimulus, valuations can turn south. Daily COVID-19 cases topped 662k on November 20th and this winter will be the greatest challenge, from an economic standpoint. US stocks had rallied to new all-time highs as the election uncertainty vanished, but now we believe CFD traders should consider several other factors that might affect valuations.
# No new stimulus
The absence of a smooth transition of power at the White House, combined with a divided US Congress will make it difficult to pass the new stimulus. At best, there will be a bill passed next month to prevent a US government shutdown, but it won’t be enough to prop up markets even further.
In Europe, Hungary and Poland are blocking the next EU budget and China had already given hints that new stimulus won’t be necessary. Markets are always pricing in future developments and as long as the prospects won’t improve in the following weeks, there should be no surprise if stocks continue to retrace.
# Weaker economic activity
Even though in the past the month of December was the best from an economic standpoint, due to the holiday season, this year it will be completely different. At best, analysts predict a flat performance, quarter on quarter, or even a double-dip recession, in case more restrictions will be imposed. For now, new COVID-19 cases seem to have topped, but we don’t know yet if it’s due to the testing capacity limit or the effectiveness of the mitigation methods in place.
For the entire second and third quarter financial markets had been pricing in better prospects as they expected the pandemic to be under control and economic activity back to normal levels. The expectations seem to have been too optimistic at the time being.
# A shift from growth to value?
Last week we’ve talked about the risks associated with rising interest rates and one of the main takeaways is the shift from growth to value. Tech names had been underperforming bank stocks, as Treasury yields in the US reached the June highs.
An acceleration in interest rates could start to weigh on the economic recovery, considering companies will need to finance their activity at higher costs. Monitoring interest rates in December would be another important factor to analyze by CFD traders.