(Reuters) – Investors are considering how a potential deterioration in President Donald Trump’s health could affect asset prices in the coming weeks as the US leader remains hospitalized after being diagnosed with COVID-19.
So far, markets have been relatively optimistic: hopes of a breakthrough in talks among U.S. lawmakers over another stimulus package have held back a stock market sell-off on Friday, with the S&P 500 losing less than 1% and so-called safe haven assets seeing limited demand. News of Trump being admitted to a military medical center outside Washington, where he remained on Saturday, came after the end of trading on Friday.
Many investors fear, however, that a severe decline in Trump’s health less than a month before Americans go to the polls on November 3 could upset a US stock market that recently recorded its worst monthly performance since its selloff in March. , causing turbulence to other activities.
If the president’s health is in jeopardy, there is “too much uncertainty in the situation for markets just to shake it off,” said Willie Delwiche, Baird’s investment strategist.
The various outcomes that investors currently envision range from a rapid recovery that strengthens Trump’s image as a fighter to a prolonged illness or death that feeds uncertainty and drains risk appetite across markets.
If uncertainty persists, the tech and momentum stocks that led this year’s rally could be particularly vulnerable to a sell-off, some investors said. The high-tech Nasdaq fell more than 2% on Friday, double the decline in the S&P 500.
“If people … get nervous right now, it probably manifests itself in crowded operations like tech and mega-caps getting a little loose,” Delwiche said.
A record 80% of fund managers surveyed last month by BofA Global Research said buying tech stocks was the “busiest” trade in the market.
Investors’ concentration in large tech stocks has also raised concerns about their huge influence on moves in the broader market.
According to research firm Oxford Economics, the five largest US companies – the parent company of Google Alphabet, Amazon, Apple, Facebook and Microsoft – now account for nearly 25% of the S&P 500’s market capitalization.
TAX STIMULUS SPEAK
Trump’s diagnosis has intensified the spotlight on fiscal stimulus talks in Washington, with investors saying the deal on another aid package could act as a stabilizing force in markets in the face of election-related uncertainty.
US House of Representatives Speaker Nancy Pelosi, a Democrat, said on Friday that negotiations are underway but is awaiting a response from the White House on key areas.
New stimulus could accelerate economic recovery from the impact of the pandemic, which has put millions of Americans out of work, and benefit economically sensitive companies whose stock performance has lagged behind this year, investors said.
For those who are underweight, “we would use this volatility as an opportunity to increase stocks as we believe we are in an early stage of economic recovery,” said Keith Lerner, chief market strategist at Truist / SunTrust Advisory.
Market action on Friday suggested that some investors may have positioned themselves for a stimulus announcement in the middle of the selloff.
The S&P 500 sectors representing industrials and financials, two groups most sensitive to a broad economic recovery, rallied by 1.1% and 0.7%, respectively, while the broader index fell.
Despite concerns about Trump’s condition, “the fiscal program was the loudest noise in the market,” said Arnim Holzer, macro defense and correlation strategist at EAB Investment Group.
Investor hedges against election-related market swings in recent months may have mitigated Friday’s decline and could, to some extent, mitigate future volatility, said Christopher Stanton of hedge fund Sunrise Capital Partners LLC. .
Despite Trump’s illness, CBOE Volatility Index futures continued to show expectations of high volatility after the November 3 vote, a pattern consistent with concerns of a contested election.
Nagging doubts that the Republican president would agree to hand over the keys to the White House in case of defeat have increased in recent weeks. During his first debate with Democratic challenger Joe Biden on Tuesday, Trump refused to commit to accepting the results, repeating his baseless complaint that ballot papers led to election fraud.
“If Trump’s health doesn’t recover … then he may forgo contesting the election,” said Michael Purves, chief executive of Tallbacken Capital Advisors. But “the markets are not abandoning the issue of contested elections right now”.
Reporting by April Joyner and Lewis Krauskopf; Writing and additional reporting by Ira Iosebashvili; Editing by Paul Simao