The S&P 500 has rallied 42 percent from its March 23 low, but the momentum has stalled over the past week as the number of daily COVID-19 infections reached the highest level on record, undermining Trump's re-election campaign as Democratic challenger Joe Biden pulled ahead.
“This new spike will persuade a majority of people to not go out,” Greg Valliere, chief U.S. policy strategist at Ontario, Canada-based AGF Investments, which has nearly $39.5 billion in assets, told FOX Business. “So the markets have to deal with that.”
Still, the tech-heavy Nasdaq Composite on Friday booked its sixth record close since COVID-19. The gains have been led by a handful of tech stalwarts, including Amazon, Apple, Microsoft and Netflix.
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“Managers are buying mega-cap tech and momentum stocks while shorting smaller cyclical and smaller stocks,” wrote Marko Kolanovic, a quant strategist at JPMorgan Chase & Co. “This trade is in part driven by market expectations for the COVID-19 pandemic to worsen (or not get better) and lead to permanent shifts in the economy.”
Virus worries reached new heights across parts of the country this week as the number of daily new infections climbed to 66,600 on Friday, 85 percent above their April 24 peak of 35,930. The approximately 800 deaths that day, though, were just 30 percent of the May high of 2,701.
Real-time data from states that have seen a surge in new cases, including Arizona, California, Florida and Texas, indicate a “significant mismatch” between low-incidence influenza-like illness symptoms and a high number of confirmed COVID-19 cases, according to Kolanovic.
He believes that's likely due to a number of factors, including a higher percentage of milder cases and younger patients, as well as more testing and an increased number of treatment options.
Those medications could get even better after Gilead Sciences on Friday said its experimental drug remdesivir, in a Phase 3 study, lowered the mortality rate of severely ill patients by 62 percent.
Additionally, BioNTech CEO Ugur Sahin told The Wall Street Journal that his company’s experimental COVID-19 vaccine is on track for regulatory approval by the end of the year.
Such developments would go a long way toward lowering the mortality rate and restoring economic confidence, which has been rattled by the sharpest slowdown of the post-World War II era.
Investors pulled into the market amid the calm would need to buy $400 billion of stocks to reach their historical median equity exposure, according to Kolanovic. He believes that could cause a rotation out of the high-flying momentum stocks and into value, helping drive the market to new highs.
The result would be an environment where investors who missed out on the rally off the March lows could get a second chance at bat, Kolanovic said.
“If there's some credible sign of a vaccine this fall, that could help Trump,” said Valliere, of AGF Investments.
Trump trails Biden by 8.8 points in a national average of polls compiled by Real Clear Politics, though the spread is tighter in key battleground states.
Valliere says Biden would “take the Senate with him” if he wins the race decisively and that one party controlling all three chambers is “not a good story for the markets.”
The stock market is a forward-looking indicator, and typically starts pricing in the election winner in September. The S&P 500 has predicted 87 percent of all presidential election winners and every victor since 1984, by rallying in the three months ahead of the vote to signal the incumbent would win – or declining to predict he would lose to a challenger, according to LPL Financial.
Trump may have history on his side as the S&P 500 gained 20 percent in the second quarter, its strongest three-month period in more than 20 years.
A quarterly return of at least 15 percent has occurred eight previous times since 1970, and LPL data showed the S&P 500 has averaged a gain of 13.9 percent in the six months that followed such an advance.
“There's still a path for Trump to win,” Valliere said. "But, it's a really narrow path."