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Last week, the S&P 500 made a valiant effort to break out to new recovery highs but ultimately failed to do so, as the stock markets finished the week on a soft note. Mike Wilson from Morgan Stanley explains three arguments for this move lower and believes it is a healthy correction which will allow the bull market to continue in the end.

Key quotes

“While there was no smoking gun for this weakness, we would chalk it up to three things: first, the spike in COVID cases has continued, and the virus remains far from contained in the US. This spike is challenging the pace of reopening of the US economy, schools, and everyday activities of life. Second, polls are suggesting Joe Biden has a very strong lead over President Trump in this year’s election, while the Democrats are also looking like favorites in congressional races. A blue sweep would usher in meaningful changes to policy going forward that are perceived to be less market friendly. Finally, valuations for the most favored parts of the equity market have reached their limits, with some stocks now reaching bubble territory.”

“This should be a correction that creates an opportunity to buy some of these great businesses at lower prices. It may also cause the overall market to trade lower, given how large and important some of these stocks are to the overall index. To me, this would be a healthy development and a necessary condition for the bull market that began in March to eventually continue. For longer-term investors, it should be the pause that refreshes.”