- Goldman Sachs’ top equity strategist told Business Insider that the “size and scale” of the economic stimulus and the slowdown in Coronavirus infection rate is supporting the current market rally.
- Peter Oppenheimer, chief global equity strategist, however, cautioned that big political events could trigger a market correction.
- “It’s also an election year in the US and that seems to have a big bearing this year,” Oppenheimer said.
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Global stocks continued their rally this week, although a brief pause on Thursday, despite mass protests across the US that has brought life to a standstill.
However, an equity strategist told Business Insider that while this rally is being driven by optimism surrounding large stimulus packages and slowdown in infection rates, big political events such as the upcoming US election could trigger a correction.
Peter Oppenheimer, Goldman Sachs’ chief global equity strategist told Business Insider in an exclusive interview that the size and scale of economic stimulus and optimism surrounding infection rates is what is driving the stock market currently.
“There’s always a balance of factors for markets. And for the most part what equity markets are reflecting on is the size and scale of the policy support and the encouraging news about a slowdown in infection rate and increase in a number of countries that are easing lockdown. So they are really pricing this gross inflection.”
Stocks on Thursday took a breather looking ahead to yet another round of jobless numbers in the US. However, they don't seem to be taking into account the large protests in the U.S.
The protests, fueled by the death of George Floyd while in police custody in Minneapolis, started last week. While the large number of protests initially were peaceful, a number of cities saw unrest, destruction of property, violence and looting in some places - including big retail stores like Macy's.
President Donald Trump on Monday threatened to deploy troops in order to control the situation.
However, while civil unrest continues to rage across America, stock markets don't seem to care. While Thursday morning saw stocks take a breather from the rally, Wednesday took Dow to a three-day winning streak and the S&P 500 to a first four-day winning streak since the start of February. The S&P is also up nearly 40% from its March lows.
Goldman's Oppenheimer cautioned that big political events tend to have an impact on financial markets and the year 2020 is significant keeping in mind the upcoming US elections, and the likely change of policies if Democrat Joe Biden wins in November
"Politics and geopolitical events can have a big bearing on financial assets in general and risk assets in particular because they can have an effect on the risk premiums. At the moment, that's not the main focus."
However, Oppenheimer explained that a market correction could happen if political issues start to weigh in. A market correction is generally defined as an event when a major stock index declines by 10% from its recent peak.
"But as we go and as more of the recovery is priced in and as time goes on and focus shifts to political issues I think that will be much more of a constraint and possibly even the trigger for a correction in risk assets."
Oppenheimer explained that while the recent peak in markets is due to large economic stimulus and the pick up in economic activity, the upcoming elections in the US could change investor sentiment.
"It's also an election year in the US and that seems to have a big bearing this year. It is important for all kinds of reasons but also the democratic candidate talks about the possibilities of reversing the tax cuts of 2017. If that happened, it would hit profit forecasts and expectations for next year and could trigger a de-rating."
Democratic candidate Joe Biden has proposed a number of tax hikes in his 2020 campaign.
Some of the plans include pushing the corporate tax rate from 21% to 28% - rolling back a move made by Donald Trump. Biden also wants to tax capital gains and impose a new payroll tax of 12.4% on high-earners and employers.