S&P 500 forecast: US election should bring clarity for stocks amid market sell-off

With days ahead until the US election, what is the outlook for the S&P 500 given the current market capitulation?

US market declines reflect major risk-off move

Stocks throughout Europe and the US have been hit hard over the past week, with traders weighing up a myriad of factors that all have the potential to significantly shift the economic and political landscape. From a US perspective, yesterday saw the third-largest one-day rise in cases on record, highlighting the ongoing potential for further restrictions.

This also adds further pressure on US President Donald Trump who has been insisting that his administration has managed to control the coronavirus in a manner that many Europeans have not. From a US perspective, many will speculate that the current declines we are seeing in markets are as heavily influenced by the US election uncertainty as the rise in coronavirus cases.

However, very little has changed in terms of the polling for this election, with markets largely growing accustomed to a Joe Biden presidency compared with previous reservations over his potential anti-business approach.

How will the election shift stimulus expectations?

The election is widely seen as a key event in helping to break the deadlock has dominated in congress over recent months. While both parties appear keen to implement a second bout of stimulus, the size and nature of that package has remained a sticking point.

For the most part, a win for Joe Biden would point towards a more substantial package ($2.2 trillion touted), yet his January inauguration would mean a two-month delay. Conversely, Trump would push for a more immediate, yet lessened package of $1.8 trillion. Quite which of these traders would prefer remains to be seen, yet it is likely that the promise of a substantial financial boost to the US economy would be viewed as a positive for markets.

However, perhaps the most damaging outcome would be another split congress, where neither party manages to take control of both the House of Representatives and Senate. Should we see the US electorate return another split congress, we could find ourselves back in a similar deadlock to the detriment of market sentiment.

Of course, that uncertainty could be dispelled if the losing party were to agree that they should cede ground to ensure a package is implemented for the greater good. In any case, markets are likely to see the election as a positive if one party takes a convincing win across both sides of congress. One curve-ball comes with the fact that Trump appears to be laying the grounds for an appeal should he lose.

With some stating that the final result may not come until days or even weeks after election day due to late postal votes, we could see short-term uncertainty if early results do not provide a clear basis for expectations.

Interestingly, Trump did similarly refuse to commit to accepting the result of the 2016 election if he were to lose. Given the delays we could see in producing the final result, the constant commentary from Trump could unnerve markets until the whole process is overcome.

S&P 500 forecast

The past week has done little to enthuse bulls, with stocks throughout the globe turning lower as coronavirus cases rise on both sides of the Atlantic. While Trump has been unwilling to entertain the idea of major lockdowns, a Biden win could result in a similarly detrimental nationwide lockdown if cases and deaths continue to rise.

From a market perspective that could bring further downside. Certainly, the current S&P 500 chart does point towards a potential market top coming into play. With the price falling back towards the critical 3209 support level, a break below that threshold would complete a double top to bring expectations of a deeper sell-off for US stocks.

Nevertheless, we remain above that threshold for now, with the wider uptrend pointing towards a potential rebound until that threshold is passed.

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