Hurricane Sandy, which caused devastation up and down the East Coast, also triggered the closure of the US stock exchanges for two days. It marks the first time the NYSE has been closed for more than one day due to weather since 1888.
What can investors expect when they return to trading? Well, while the Nasdaq and NYSE have been closed for business, we have been able to track futures. On Tuesday, S&P index futures ended the session 0.2% higher. Meanwhile, European shares closed higher, helped by positive earnings reports.
It is certainly a disruption to have the US stock market closed for such an extended period of time. But I think investors can expect to find the market acting in much the same way it did last week, before the storm hit. Last week, the S&P 500 notched its biggest pullback since June, falling roughly 5% from its fall peak. Since peaking in September, US equities have traded lower.
What is causing this negative sentiment? A combination of events. First, the markets largely expected the Federal Reserve’s third round of quantitative easing, so stocks have not gotten the same boost as from previous announcements.
Second, the earnings season is shaping up to be a mediocre one. As of Friday, third-quarter earnings are down around 2%. While that is in line with expectations, if it continues it will mark the end of 11 quarters of earnings growth. In addition, only 42% of companies in the S&P 500 have reported sales above estimates. While gross domestic product growth did accelerate in the third quarter–from an anemic 1.3% in the second quarter to a more respectable 2%–the recovery is not really strong enough to generate much revenue growth.
And as we get closer to the election, we’re seeing some reluctance to commit new capital to the markets. With the polls tightening in both the race for the White House and the Senate, there is growing uncertainty about the shape of the government in 2013 and how this might impact markets. A continuation of divided government will make it more difficult to negotiate a compromise over the fiscal cliff, the risks associated with the tax hikes and spending cuts scheduled to hit on January 1. If the election produces a clear sweep by one party, this will make it more likely that the fiscal cliff can be avoided and will take some pressure off stocks.
In the absence of a clear outcome, we believe volatility is likely to rise further. We’ve already seen the VIX index – which is often referred to as the “fear gauge” — increase from a multi-year low of 13 in August to nearly 20 last week. [Volatility ETFs]
In this type of environment, we would emphasize some of our all-weather themes such as:
- Municipals, like the iShares S&P National AMT-Free Municipal Bond Fund (MUB) ;
- US minimum volatility, like the iShares MSCI USA Minimum Volatility Index Fund (USMV) ; and
- International equity exposure, like the iShares MSCI ACWI ex US Index Fund (ACWX) . Since the start of October, international stocks have outperformed the United States.
Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist.