Clinton-Trump debate showdown carries potential to sock stocks
Market volatility is near lows for the year, suggesting calm before storm.
The outcome from the head-to-head matchup carries the potential to deliver a jolt to U.S. equity markets coming off closely watched policy decisions by central bankers.
Stocks finished the week higher, even with a Friday downturn, with the Dow Jones Industrial Average DJIA, -0.71% advancing 0.8%, and both the S&P 500 index SPX, -0.57% and the Nasdaq Composite Index COMP, -0.63% rising 1.2%, following a widely expected move on part of the Federal Reserve not to raise interest rates in September.
On the heels of a mostly spirited upswing for the benchmarks, the debate may be, outside of another important meeting of major oil producers, the most important event of the week.
The first presidential debate between Clinton and Trump takes place Monday night at Hofstra University.
In a recent McClatchy-Marist poll, Clinton leads Trump by 48% to 41% in a two-way race, and 45% to 39% when including Libertarian candidate Gary Johnson and Green party candidate Jill Stein into the mix.
Read: Why the Fed is losing credibility
“The market may react to a perceived shift in momentum,” said Randy Frederick, managing director of trading and derivatives at Schwab Center for Financial Research, in an interview. “Tuesday could see some volatility seeing the market’s been a bit complacent.”
Complacent, as in, the CBOE Volatility index VIX, +2.25% has spent much of the year below its 200-day average and is currently near its lows of the year. The VIX sitting at near its nadir suggests that stocks will be more prone to react sharply to events like Monday evening’s debate, Frederick said.
“One thing markets will be watching is whether either of the candidates comes across as, for lack of a better word, scary,” said Brad McMillan, chief investment officer at Commonwealth Financial Network, in emailed comments.
“Market reaction will probably depend on how successful each candidate is in demonizing the other’s proposals, and how effective each is in his or her own defense,” McMillan said.
Outperformance by one candidate over the other could even have sector-specific ramifications, according to Chris Zaccarelli, chief investment officer at Cornerstone Financial Partners.
“For example, if Donald Trump is perceived to have had the better performance then I would expect the biotech subsector to outperform on Tuesday,” Zaccarelli said. “Conversely, if Hillary Clinton is perceived to have had the better performance then I would expect that area of the market to underperform.” The iShares Nasdaq Biotechnology ETF IBB, -0.63% finished off 0.6% Friday and is on track to post a 12% decline so far in 2016.
Not everyone is convinced, however, that the debates have the potential to spook stock investors.
“Folks should not conflate the volatility we will no doubt experience due to upcoming quarterly earnings softness with volatility that may come with the debates—the debates will be great TV, for sure, but nothing else with regard to markets,” said Jamie Cox, managing partner at Harris Financial Group.
Meanwhile, the expected presidential face-offs will be broken up by a vice presidential debate between Tim Kaine and Mike Pence on Oct. 4. The next two presidential debates are scheduled to take place on Oct. 9 and Oct. 19.
Earnings ahead
Looking beyond the presidential contest, a peppering of corporate quarterly results are slated for the coming week.
“Off-calendar” earnings, or notable earnings like Nike Inc. NKE, -0.47% and PepsiCo PEP, -0.45% that don’t occur within the traditional earnings season, won’t likely affect broader markets, Frederick said. Rather, investors will be looking for the bulk of earnings season in October where the S&P 500 is expected to make more progress on turning the corner back to earnings growth after five consecutive quarters of declining profits.
The expected earnings decline for the S&P 500 in the third quarter is just within range to result in flat, rather than “negative,” growth for the quarter, considering that earnings estimates generally average about 2 percentage points below their actual outcome. Third-quarter earnings are expected to decline by 2.3% year-over-year for the S&P 500, according to John Butters, senior earnings analyst at FactSet.
Market volatility is near lows for the year, suggesting calm before storm.
The outcome from the head-to-head matchup carries the potential to deliver a jolt to U.S. equity markets coming off closely watched policy decisions by central bankers.
Stocks finished the week higher, even with a Friday downturn, with the Dow Jones Industrial Average DJIA, -0.71% advancing 0.8%, and both the S&P 500 index SPX, -0.57% and the Nasdaq Composite Index COMP, -0.63% rising 1.2%, following a widely expected move on part of the Federal Reserve not to raise interest rates in September.
On the heels of a mostly spirited upswing for the benchmarks, the debate may be, outside of another important meeting of major oil producers, the most important event of the week.
The first presidential debate between Clinton and Trump takes place Monday night at Hofstra University.
In a recent McClatchy-Marist poll, Clinton leads Trump by 48% to 41% in a two-way race, and 45% to 39% when including Libertarian candidate Gary Johnson and Green party candidate Jill Stein into the mix.
Read: Why the Fed is losing credibility
“The market may react to a perceived shift in momentum,” said Randy Frederick, managing director of trading and derivatives at Schwab Center for Financial Research, in an interview. “Tuesday could see some volatility seeing the market’s been a bit complacent.”
Complacent, as in, the CBOE Volatility index VIX, +2.25% has spent much of the year below its 200-day average and is currently near its lows of the year. The VIX sitting at near its nadir suggests that stocks will be more prone to react sharply to events like Monday evening’s debate, Frederick said.
“One thing markets will be watching is whether either of the candidates comes across as, for lack of a better word, scary,” said Brad McMillan, chief investment officer at Commonwealth Financial Network, in emailed comments.
“Market reaction will probably depend on how successful each candidate is in demonizing the other’s proposals, and how effective each is in his or her own defense,” McMillan said.
Outperformance by one candidate over the other could even have sector-specific ramifications, according to Chris Zaccarelli, chief investment officer at Cornerstone Financial Partners.
“For example, if Donald Trump is perceived to have had the better performance then I would expect the biotech subsector to outperform on Tuesday,” Zaccarelli said. “Conversely, if Hillary Clinton is perceived to have had the better performance then I would expect that area of the market to underperform.” The iShares Nasdaq Biotechnology ETF IBB, -0.63% finished off 0.6% Friday and is on track to post a 12% decline so far in 2016.
Not everyone is convinced, however, that the debates have the potential to spook stock investors.
“Folks should not conflate the volatility we will no doubt experience due to upcoming quarterly earnings softness with volatility that may come with the debates—the debates will be great TV, for sure, but nothing else with regard to markets,” said Jamie Cox, managing partner at Harris Financial Group.
Meanwhile, the expected presidential face-offs will be broken up by a vice presidential debate between Tim Kaine and Mike Pence on Oct. 4. The next two presidential debates are scheduled to take place on Oct. 9 and Oct. 19.
Earnings ahead
Looking beyond the presidential contest, a peppering of corporate quarterly results are slated for the coming week.
“Off-calendar” earnings, or notable earnings like Nike Inc. NKE, -0.47% and PepsiCo PEP, -0.45% that don’t occur within the traditional earnings season, won’t likely affect broader markets, Frederick said. Rather, investors will be looking for the bulk of earnings season in October where the S&P 500 is expected to make more progress on turning the corner back to earnings growth after five consecutive quarters of declining profits.
The expected earnings decline for the S&P 500 in the third quarter is just within range to result in flat, rather than “negative,” growth for the quarter, considering that earnings estimates generally average about 2 percentage points below their actual outcome. Third-quarter earnings are expected to decline by 2.3% year-over-year for the S&P 500, according to John Butters, senior earnings analyst at FactSet.
