They say the stock market climbs a wall of worry. A lot of sophisticated investors are modeling for risks up ahead, ranging from a long coronavirus siege to even worse economic news.
But Bank of America Securities has three more risks that aren’t getting much, if any attention—and are entirely plausible. To the unit’s research chief, Jared Woodard, and his team, these “are surprises that could have big impacts on the markets.”
And why not? This century has already hit us with two massive surprises: a housing boom that poisoned the entire world financial system and almost destroyed it, and a pandemic that has disrupted how people live, killed hundreds of thousands, and upended the system yet again.
Here’s what, according to their research note, may knock us off our feet next:
A vaccine conquers the virus, and soon. That would bring back a form of the world we used to know. “Financial assets are not priced for a return to normal,” BofA said. OK, this is a problem we’d all love to have.
Right now, pharma firms from Moderna to Regeneron are feverishly working on vaccines and treatments for COVID-19. Of course, there are the Russians, who are rushing their vaccine into use, to the dismay of many medical experts who fear it hasn’t been adequately tested for safety and effectiveness.
What would this all mean for investors? Surely, it would boost the market even higher. Asset allocation would shift, too. To the BofA research folks, “the risk worth considering is that an early vaccine could spark a significant tactical rotation out of deflationary defensives and into cyclical sectors.”
Election stalemate leads to House-selected president. Today, talk abounds about how the election might end up contested in the courts amid recounts, a true nightmare. How might it end up if no candidate got the needed 270 electoral votes?
According to the Constitution, the House would select the winner, with the stipulation that each state’s delegation gets one vote. So California, with 53 House members would count as much as Montana, with one. Result: Donald Trump would likely get re-elected. You think partisanship in Washington is bad now? The market will not like that kind of environment.
No new stimulus gets passed. A lot of federal rescue programs, enacted in the spring, are expiring. The extra $600 in unemployment benefits is now history. And the two sides of the debate—the GOP-run Senate and the Democrat-controlled House—are in a stalemate. As we pass Labor Day and the election season heats up, getting anything done on Capitol Hill will be unlikely. This will bring a lot of financial pain to many American households, and will no doubt be a bad influence on the economy. Not to mention stocks.
As BofA put the matter, “Only a market correction would wake policymakers from their dogmatic slumber. While others are hedging the election, consider preparing for a Q3 buying opportunity.”