Bell Potter’s Richard Coppleson tips sharemarket rebound after the US election

It has been a rough week for stocks as bond yields continue to soar, but the US election could offer a buying opportunity.

Despite jitters about rates, inflation and the US election, the next few weeks could be a buying opportunity for investors. Picture: Getty Images

It was a rough week for stocks as bond yields soared on reduced hopes of interest rate cuts by central banks, US political uncertainty and jitters about the inflation outlook after the election, but it’s shaping up to be a buying opportunity, according to some.

Except for a 1.5 per cent fall in gold from a record high of $US2787.61 per ounce, there were few signs of a peak in the recent volatility, risk-aversion and safe haven buying.

That could remain the case before the US election-day drama next week.

But it’s worth considering what can happen around such events, especially when the market gets what it believes to be a “worst case” outcome like Brexit or the 2016 election result.

The upshot is that most of these events tend to be buying opportunities.

It’s also worth remembering that this is usually the most bullish time of year for stocks.

After surging more than 40 per cent in the past 12 months, the S&P 500 fell almost 3 per cent from a record high two weeks ago. The sell-off accelerated with a 1.9 per cent fall on Thursday as quarterly reports from Meta and Microsoft raised concerns about how much they’re spending on AI.

It was a similar story for the Australian market as the S&P/ASX 200 fell as much as 3.8 per cent from a record high, after soaring about 24 per cent in the past 12 months.

While recent falls in shares have been relatively tame, October was the worst month in six.

The VIX volatility index “fear gauge” – which measures the volatility implied by the prices of S&P 500 options – averaged 20 per cent in October versus its long-term average of 19.5 per cent.

That was too high for the US stockmarket to keep setting record highs as it has done this year.

The VIX shot up to a two-month high near 23 per cent on Thursday and showed no sign of a peak.

There was also no sign of a peak in government bond yields, which have soared about 75 basis points since mid-September, even as the Federal Reserve delivered a jumbo-sized 50 basis point interest rate cut last month. With the crucial 10-year Treasury yield rising to 4.3 per cent versus an earnings yield of about 3.4 per cent for the S&P 500, it was increasingly a headwind for stocks.

US non-farm payrolls and ISM Manufacturing data also loomed as potential catalysts on Friday.

Richard Coppleson, institutional sales and trading head at Bell Potter.

But Bell Potter’s venerable head of institutional sales and trading Richard Coppleson is betting on a strong year-end rally in stocks despite the sell-off over the past two weeks.

“The December quarter has too many times been consistently the strongest and most dominant quarter in most years,” Mr Coppleson said. “Institutions need to chase performance into year-end and we see too many times FOUM – fear of underperforming benchmark – that drives this.”

Possibly with the exception of SMID (small and mid) caps, a “dirty little secret” of the US funds management industry is that even the smartest US funds don’t beat their benchmarks on a consistent basis.

“Last year just 40 per cent of US institutional investors beat it but 60 per cent underperformed,” Mr Coppleson wrote in The Coppo Report.

“In fact the last time that over 50 per cent beat their benchmark in the US was 2009 when 52 per cent beat it.

With just two months to go before year-end, he said institutional investors would need to “work hard to try and make up for underperformance.”

“Knowing that markets normally rally into year-end, many will just jump onto the bandwagon and go long,” Coppleson added.

Another bullish factor in his mind is that US corporate stock buybacks will be happening at their most aggressive pace for the year in November and December.

“It’s a strong cocktail for a strong end-of-year run that we see too many times to ignore,” he said. “It will happen yet again this year.”

And despite the falls in October, he said shares in the US and Australia were “100 per cent” likely to rise strongly before year-end no matter what the US political landscape after the US election.

Looking at what happened on the US election day in 2016, Hillary Clinton looked good initially but the S&P/ASX 200 dived 3.9 per cent as it became clear that Trump would win before closing down 1.9 per cent. It rose 13 per cent over the next two months.

The ASX 200 also went up after Joe Biden won in 2020, rising 12 per cent in the next two months. According to Goldman Sachs, the median S&P 500 move from October 27 to December 31 in election years has been a significant rise of 6.25 per cent.

And after the Brexit referendum in 2016, the ASX 200 fell as much as 3.8 per cent on the day of the vote but rose 8.8 per cent over the next two months.

Still, while risk-aversion may hit a peak next week, it could linger while the market gauges the make-up of congress. And if Trump wins the election, investors will be looking for clarity on his plans for international trade, immigration and the Federal Reserve, as well as fiscal policy.

“For the broader market the average S&P 500 return for the 12 months after a US election has been 16 per cent since 1984 and I see no reason why this is not achievable,” said Tiger Brokers chief strategy officer, Greg Boland.

“However, the intervening months may be bumpy.”