Strap in and Brace Yourself

Dear Reader,

September’s warning shot, a correction in the NASDAQ as tech stocks rolled over, is a crystal-clear signal that October won’t be a smooth ride for index investors. This isn’t an ordinary fall season slump, as an ultra-contentious election season adds fuel to the already blazing dumpster fire of a market.

Suffice it to say that the perma-bulls are not going to enjoy Q4 at all. The month of October already has a well-earned reputation for negative surprises, with 1929, 1987, and 2008 being prime examples of how spooky things can get as Halloween approaches.

There’s data to back this up: going back to 1950, there are more 1% or larger daily swings in October in the S&P 500 than any other month. And that includes both election and non-election years. 2020 is shaping up to be more volatile than usual.

For the week ending on September 19, there were 870,000 new jobless claims in the United States. This exceeded the already high estimate of 840,000. The market already priced in a smooth road to recovery during the summer, but in reality, this hasn’t panned out.

The market also assumed that there would be additional stimulus from Washington, but now it looks like the government won’t come through (no surprise there). As a result, jobless Americans are stuck in limbo, waiting for the relief funds that aren’t coming while the bills continue to pile up.

As Legal and General Investment Management’s Justin Onuekwusi explains, “it is now clear that Congress will not attach additional fiscal stimulus to the continuing resolution. This implies that after a final round of extra unemployment benefits that is currently being disbursed, any further fiscal support will likely have to wait until 2021.”

Moreover, America’s shaky labor market has ripple effects because consumers aren’t in the mood to spend their dwindling savings. Money velocity is the lifeblood of the economy, and in the face of a pandemic with no clear timeline for a vaccine, the outlook for October through the year’s end is particularly bleak.

And don’t expect any last-minute miracles from Capitol Hill this year, either. Politicians on both sides of the aisle are in no mood to sit down and work out a deal. Plus, the battle over the appointment of a new Supreme Court Justice will add further complexity and discord as the 2020 election quickly approaches.

As for the election itself, you can count on the result being fiercely contested regardless of the outcome. If Biden somehow manages to take the election from Trump, the President will not sit by and allow an uncontested transfer of power – he’s openly admitted this.

Put it all together and you’ve got a recipe for a stunningly volatile fall season. Don’t be surprised if overpriced tech stocks lead the decline. The chart above overlaps the NASDAQ of 2020 (in orange) versus the NASDAQ of 1999 at the peak of the Dotcom bubble.

Similar trends emerge when we compare the scenarios from then and now. From the March low of this year, the NASDAQ 100 surged 84% over 163 days. In 1999, the index rose about 86% over 151 days.

In practical terms, this means we have to pick and choose our investments carefully. That’s been our approach all along, and those of you who followed our buy targets from Watch List #1 and Watch List #2 cleaned up with one winner after another.

I’ve recently put out a third one, but I recommend you download and save all of them for stocks to watch and consider if and when they fall below our limit prices. Watch List #3 has our latest research-backed picks and buy prices. It won’t be an easy election season to make money unless you’ve got a game plan. Due diligence will be your best survival tactic as volatility ramps up and shakes out the uninformed and the unprepared.