Over the last three weeks, the S&P 500 ETF (SPY) is down 9%. And, it looks to be on the verge of retesting its previous lows from late-September.

Some of the reasons cited for the market’s sell-off are election-related uncertainty, rising coronavirus case counts in the US and all over the world, failure to reach agreement on a stimulus deal, and concerns that the economy’s recovery is losing steam.

The election is clearly a major risk factor especially if there’s a contested election that creates a constitutional crisis. Markets hate uncertainty, and this outcome would create the maximum amount of uncertainty.

Another bearish development has been coronavirus case counts reaching new highs.  Health officials have been adamant that the situation is going to get worse as winter approaches. This is already being seen in the daily reports and in certain areas hospitals are reaching maximum capacity.

In part, the rising case counts, economy losing steam, and stimulus are all interconnected. Areas with rising case counts tend to see diminished economic activity and the failure of Congress to reach an agreement on a stimulus deal is impeding the recovery.

Reasons to be Bullish

While these are significant short-term issues, seasonality is suggesting that stock prices will likely end the year at higher prices than current levels. The most potent short-term threat is a contested election, however, I don’t think this is likely.

Many experts are anticipating election-day situations in which President Trump contests the elections. Instead, I believe it’s much more likely that we will immediately know the outcome based on early returns from states like Florida, Arizona, and Ohio, who will complete their tabulations on Election Day.

These states will give important insights into the voting behavior of Sunbelt and white working class voters. Trump needs to outperform with both groups to win, while Biden needs to outperform with one of the two to come out ahead.

If Biden outperforms with either group, he will be the next President regardless of the final vote count. On the other hand, if Trump outperforms with both groups, then he will become a favorite to win the election and recreate his 2016 path to victory.

The other bearish development is the coronavirus. Its recent trajectory is troubling and brings with it a lot of pain and suffering. This could intensify if President Trump doesn’t win which means another package may not be passed until February.

However, in terms of the stock market, we’ve learned that the market can be placated with sufficient fiscal and monetary stimulus. If Congress is slow to act, the Fed is likely to initiate even more aggressive easing.

Positive Seasonality After Election

Beyond this factor, seasonality is also very supportive. Currently, the S&P 500 seems to be following its typical path of dipping into early-November as witnessed by the chart from LPL Financial below. In election years, stocks tend to trend higher into year-end. This implies a bottom for stocks early next week.

Ultimately, this means that investors should look at the current weakness as an opportunity to buy. Stocks are likely to rally regardless of who comes out ahead although the composition of the rally may differ.

Some other reasons to be bullish are the low-rate environment and the fact that another fiscal stimulus bill will be passed although the size and timing could be affected by the virus’ path and the elections.

Four stocks to consider buying during this dip are Alibaba (BABA), Cloudflare (NET), Bunge (BG), and Caterpillar (CAT). These companies are driven by long-term trends that will exist long after the election and the coronavirus pandemic.

Alibaba (BABA)

Alibaba’s stock has been almost immune to the weakness in the broad market. While the overall market is down nearly 10% in October, BABA has been consolidating between $300 and $310. This type of accumulation during a period of volatility in the broad market is a good sign that the stock will take off when broad market conditions improve.

[Note that BABA is one of 5 stocks in the Reitmeister Total Return portfolio. Learn more here.]

Alibaba’s business is mostly based in Asia, where the coronavirus has been much better contained than in the US or Europe. Additionally, it has exposure to eCommerce and cloud computing which are two of the fastest-growing parts of the global economy.

Finally, the company is much more reasonably valued than other mega-cap tech stocks with a forward p/e of 26 and sales growth of 33%. However, BABA is growing faster than these companies and doesn’t face the same regulatory risk.

How does BABA stack up for the POWR Ratings?

A for Trade Grade

A for Buy & Hold Grade

A for Peer Grade

A for Industry Rank

A for Overall POWR Rating

You can’t ask for better. The stock is also ranked #1 out of 115 stocks in the China group.

Cloudflare (NET)

NET is another stock showing outperformance during the past few months. From early-September, the S&P 500 is down 10%, yet NET is up 30% over this period.

The major factors behind NET’s outperformance are the strong performance of cybersecurity and cloud companies and the introduction of its new cloud platform. In early-October,   Cloudflare announced Cloudflare One, a network-as-a-service solution for cloud-based security, performance, and control through a single user interface.

The platform integrates with existing identify-verification software, and it opens up a new market for Cloudflare to enter. It also shows that Cloudflare intends to go from an Internet security company to a total provider of security solutions for companies.

NET is rated a Buy by the POWR Ratings. It has an “A” for Trade Grade and Peer Grae with a “B” for Buy & Hold Grade. Among, Software – Security stocks, it’s ranked #5out of 23.

Bunge (BG)

BG operates in the agribusiness and food industries. In recent months, agricultural stocks have been quite strong as extreme weather is hurting crop yield and pushing prices higher.

As a result, BG’s stock has been trending higher and is up 25% YTD. Investors’ optimism was validated by earnings growth. In its last quarter, BG topped expectations and increased guidance above consensus. Over the last four years, it’s increased earnings per share from $2.47 to $6.95. Despite this, its stock is down by 30% over this timeframe.

The POWR Ratings rate BG as a Strong Buy. It has an “A” for Trade Grade, Buy & Hold Grade, and Peer Grade with a “B” for Industry Rank. Among Agriculture stocks, it’s ranked #2 out of 28.

Caterpillar (CAT)

Until this past week, CAT had defied the overall trend in equities as it was carving out new, all-time highs. Some reasons driving prices higher are that there’s expected to be an explosion in infrastructure projects across the globe as countries boost their economies following the coronavirus.

Further, manufacturing is expected to expand in 2021 following three years of contraction. This, in combination with the coronavirus, has resulted in inventories being depleted. An inventory restocking cycle would be a positive tailwind for the industrial economy and stocks like CAT.

The POWR Ratings are also bullish on CAT as it has a Buy rating. It has an “A” for Trade Grade and Industry Rank with a ”B” for Buy & Hold Grade and Peer Grade. Among Industrial – Machinery stocks, it’s ranked #13 out of 60.

Conclusion

The election is going to be the next major inflection point for the stock market. Expectations are for a Biden victory and for the Democrats to win the Senate based on current polling and odds in political markets.

I believe that this outcome would lead to a strong, positive reaction in many stocks and even cause a spike in long-term interest rates, because this outcome would lead to a more aggressive dose of fiscal stimulus. This would result in gains for oversold sectors like financials, energy, and value stocks.

On the other hand, some combinations of Biden with Senate Republicans or Trump with Senate Democrats or Republicans would likely lead to treasury yields declining. Recent history shows us that this outcome leads to obstruction. During more prosperous times, this gridlock can yield positive results, but it makes the odds of the passage of a stimulus package much worse.

This would result in a situation where the Fed continues to do the heavy lifting. Growth stocks would likely continue to outperform, and current laggards would continue their underperformance.

Given this uncertainty, investors should consider BABA, CAT, BG, and NET. These stocks are benefitting from trends that will continue regardless of the political outcome.

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BABA shares rose $0.46 (+0.15%) in after-hours trading Friday. Year-to-date, BABA has gained 43.65%, versus a 2.91% rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...

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