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Markets have been weak in September. The good news is that prices have corrected, with the S&P 500 now down about 10% from its August highs. But the bad news is that four specific risks are still hanging over the market and all are yet to be resolved. Andrew Sheets, Chief Cross-Asset Strategist at Morgan Stanley advises investors to remain patient. 

Key quotes

“Our economists and I think many others in the market had been assuming that the US would approve about $1 trillion of additional stimulus. But recent progress on this front has not been promising. And the emerging controversy over the fate of the US Supreme Court only further complicates this process. Indeed, it’s very possible that ahead of the US election, Congress only has time to either pass additional stimulus, or confirm a new Supreme Court justice, but not do both. A trillion-dollar swing in economic support is, needless to say, a very big deal and has a large bearing on what the near-term economic outlook could look like.”

“History suggests that markets often struggle in the months leading up to a US presidential election, especially when the result looks uncertain or might be close.”

“September, and especially the end of this month, represents a very important waypoint for the virus’s spread as it will represent about a month after many schools and universities have reopened. That could do a lot to shape expectations of what the autumn looks like and whether or not there’ll be a second wave. Unfortunately, cases are starting to rise again in Europe, while in the US 37 states now have R rates above 1.”

“It’s been over four years since the original vote but the Brexit saga remains unresolved. And key deadlines are approaching over the next two months. Morgan Stanley’s economists have recently raised their odds of a ‘no-deal’ outcome. The scenario that would create the most near-term market and economic uncertainty.”

“These four risks, and their unresolved nature, are all reasons that we think market volatility will persist over the near-term. But we also think these issues will, ultimately, prove to be only temporary hurdles for the market. For now, we think investors should stay patient and wait for more clarity before moving to buy the dip.”