The volatility is giving both institutional and main street investors a reality check on how their assets are allocated.
The benchmark S&P 500 was trading lower by 1.7% early Friday and was fighting to hold near-term technical support in the 3,340 area after recouping the majority of its losses from a bruising 9.7% selloff during the first three weeks of September.
“The one thing that we know with certainty is that uncertainty is anathema to investing in risk assets,” David Rosenberg, chief economist and strategist at Toronto-based Rosenberg Research told FOX Business.
He believes the president’s positive test will make even the most ardent Trump supporters “more cautious,” resulting in them spending less and saving more.
Such behavior would pose additional risks to a U.S. economy that is in the midst of battling back from its sharpest contraction of the post-World War II era and could accelerate the need for additional government stimulus.
House Democrats on Thursday evening passed a $2.2 trillion stimulus package, but the measure is expected to fail in the Senate as Republicans have their sights set on a “skinny package” worth $1.5 trillion. Both sides agree on sending another round of direct payments to Americans.
The potential economic impact of Trump’s positive test is causing some investors to rebalance their holdings.
Institutional players will “start de-risking portfolios and increasing hedges in preparation for market volatility,” wrote James McDonald, CEO of Los Angeles-based Hercules Investments, a portfolio manager with $250 million in assets across the U.S., Canada and China.
That means investors could move away from value stocks, which were the preferred way for investors to play a transitioning economy, and back into stay-at-home names, as well as safe havens such as gold and precious metals.
Anyone who wants to be involved in the stock market should stay focused on companies that are growth-oriented, have strong balance sheets and great business models that are behaving like utilities, according to Rosenberg.
Mega-cap tech stocks, like Alphabet Inc., Amazon Inc. and Microsoft Corp. have been “rerated as utilities because they have become essentials,” Rosenberg said. “The longer we have the stay-at-home theme and the work-at-home theme, the higher the valuations these companies are going to receive.”