[Weekly Market Outlook] US Presidential Election on the 3rd... Finding 'Opportunities' Amid Volatility

[Asia Economy Reporter Oh Ju-yeon] In the last week of October, the KOSPI fell below the 2300 level, and the KOSDAQ index dropped below 800. This was due not only to concerns about delayed economic recovery caused by the resurgence of the novel coronavirus infection (COVID-19), but also increased market volatility ahead of the U.S. presidential election scheduled for the 3rd. Analysts suggest that this volatility may continue into the first week of November.

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On the 1st, NH Investment & Securities projected the expected KOSPI band for the first week of November to be between 2280 and 2400. While expectations for the third-quarter earnings season and the possibility of year-end dividend-related capital inflows are considered positive factors, skepticism about economic improvement, uncertainties related to the U.S. presidential election, and the resurgence of COVID-19 are seen as negative factors.

It was explained that the stock market could move sensitively because a number of important events are concentrated in one week. The U.S. presidential and congressional elections will be held on the 3rd, and the Federal Open Market Committee (FOMC) meeting is scheduled for the 4th. Additionally, with the rapid increase in COVID-19 cases in the U.S. and Europe, the stock market is likely to pay close attention to the U.S. election and the resurgence of COVID-19.

Labor Researcher Roh Dong-gil of NH Investment & Securities said, "The key issue is the strength of U.S. policy in response to the resurgence of COVID-19," adding, "Investors are expected to focus again on remarks by Jerome Powell, chairman of the U.S. Federal Reserve (Fed), when stock market volatility expands." Chairman Powell has emphasized the importance of fiscal policy while also indicating that monetary policy tools have not been exhausted and that additional measures could be taken if necessary. If the financial market repeatedly undergoes rapid price adjustments due to the COVID-19 resurgence, there is hope for the FOMC to respond.

Roh added, "Given that the FOMC schedule is approaching next week, the extent of price adjustments may be more limited compared to the past."

He also noted, "Although political uncertainty may ease after the election, various other variables surrounding the stock market remain, so the election alone is not a variable that will completely determine the market direction."

A representative variable is the scenario of election contestation.

Lee Kyung-min, a researcher at Daishin Securities, said, "With the U.S. presidential election taking place on the 3rd, uncertainty stemming from the election and market volatility are likely to intensify." He explained, "If Trump is re-elected, concerns about the retreat of economic stimulus policies and the burden of U.S.-China conflicts may arise; if Biden wins, the possibility of Trump's election contestation becoming a reality, as well as policy burdens such as tax increases and stricter regulations on IT companies, could stimulate market volatility." Accordingly, he predicted that investor sentiment and supply-demand instability will inevitably increase next week.

Hana Financial Investment also projected the KOSPI band for next week to be between 2300 and 2400, warning that volatility could increase if the election contestation scenario materializes. Lee Jae-sun, a researcher at Hana Financial Investment, said, "Ahead of the election on the 3rd, the domestic stock market is expected to remain dominated by a wait-and-see attitude." He added, "Although there are concerns about Trump's election contestation, since the S&P 500 has already reflected this uncertainty and fallen by more than about 7% from its October peak, the extent of the correction itself is unlikely to be large. Along with this, the market will focus on signals from the FOMC meeting held after the election that could soothe the market."

Meanwhile, experts unanimously agreed that, in the long term, this correction could be an opportunity to increase exposure.

Moon Nam-jung, a researcher at Daishin Securities, said, "Since the U.S. presidential election is the biggest concern determining the direction of the current market that has lost momentum, increased market volatility is inevitable until the election results are announced, but it is highly likely that a structure for an upward trend will be established after the election."

He continued, "The greater the probability of a 'Blue Wave,' where the Democratic Party controls both the House and Senate, the higher the expectations for a large-scale fifth economic stimulus package. The Fed is also more likely to explicitly mention the average inflation targeting policy as a way to overcome the lack of additional policies. Since one of these two variables could produce the market-desired outcome within November, the first week of November, when the election is held, is a good opportunity to increase the proportion of risky assets, keeping in mind the fourth quarter in the near term or the first half of next year in the longer term."

According to Daishin Securities, in the three instances since 2000 when the U.S. presidency changed hands, the S&P 500 index fell by 4.9% and 6.5% in September and October before the election, marking two consecutive months of decline, but the decline narrowed in November and December (-4.0%, -1.0%), stabilizing the market.

Researcher Moon analyzed, "Although this time there is the special factor of COVID-19, it is necessary to note that market volatility eased after the election due to the resolution of uncertainty."