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Will a Turbulent Election Derail Economic Recovery?

As Election Day in the United States nears and the coronavirus vaccine trials continue, headlines may lead to volatility, but we expect economic rebound to keep on.

Dave Sekera, CFA 31.10.2020

Takeaways

  • The timing of a vaccine approval is the biggest unknown in the short term that has the most significant consequences on the markets.
  • We don’t think that the outcome of the presidential election will significantly alter our valuations or meaningfully change our economic outlook, but we acknowledge that a contested result and drawn-out ballot counting or litigation would intensify short-term volatility.
  • While the consensus from market forecasters on Wall Street is that the market will be especially volatile come this November, it could also be relatively mundane.

We think the equity market is currently fairly to very slightly overvalued from a broad market perspective. However, we see pockets of undervaluation. Across our North American coverage, we rate 36% with Morningstar Ratings of 4 or 5 stars. Breaking down the coverage by Morningstar Style Box reveals that the greatest number of undervalued stocks reside in the mid-cap category and that the highest percentage of 4- or 5-star stocks are found in the small-cap space.

While the broad market index has risen 9.24% in the third quarter and 5.84% for the year to date, those gains have largely been driven by large-cap growth stocks.

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About Author

Dave Sekera, CFA  Dave Sekera, CFA, is a senior securities analyst with Morningstar.

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