Politics, viruses and vaccines
The closely watched US election and its aftermath has recently taken a back seat to breakthrough vaccine progress, an apparent second wave of the Covid-19 virus, and central bank policy.
Despite the tight and messy presidential race last month, equity markets spiked up instead of down on initial news that no clear victor had emerged due to ballot delays and that President Trump would contest the outcome in the courts. From Election Day, November 3 to Thanksgiving Day, November 26, the S&P 500 gained 7.73 per cent while the MSCI World Stock Index advanced by 9.30 per cent lifting both indices to all-time highs.
In the weeks prior to the election, some strategists had opined that a contested race, dragging on for days, weeks or even months would be bad for the markets. And yet, optimism that Republicans would likely retain a majority presence in the Senate eventually overshadowed the conflicted presidential runoff.
So far, it is clear that equity markets are not averse to a change of administration so long as the Republicans maintain control of the Senate. Checks and balances in Washington have historically been important to investors. This one is likely no exception.
On balance, Joe Biden’s proposed policies will be less market friendly than President Trump’s. However, the final tally showed not the previously forecasted Democratic Party “Blue Wave” sweep, but a Purple Wave which included a large swath of Republicans mixing in a fair amount of red with the blue.
Not only will the GOP likely retain a majority in the Senate, but is also forecasted to gain 13 new seats in the House of Representatives. This was quite an upset when compared to the polls which predicted a loss of 10 to 15 seats in Congress.
As the narrative rotated to “gridlock is good”, markets capitulated to the upside during election week and beyond. Investors hedging long positions or holding large money market balances on the sidelines earning almost no interest needed to put cash to work and that helped fuel the rally.
In terms of fiscal policy, a divided American house means Biden’s proposed tax hikes are less likely to be implemented. He ran on a platform of raising the corporate income tax from 20 per cent to 28 per cent as well as increasing capital gains taxes and income tax on high earners. Overall, Biden would like to reverse President Trump’s 2017 tax cuts, which boosted growth throughout much of his four-year term. But those increases require co-operation from the legislative branch and that’s now no longer likely to happen.
On the positive side, Biden may have a softer touch on international trade. As the former vice-president to Obama, Biden’s polices can be extrapolated from prior experience. Presumably, he would have less of an axe to grind against Europe and China. Improved trade relations could be a boon to many internationally exposed industries including technology.
On the other side of the equation, the Purple Wave fades hope for a massive government stimulus programme which was previously given high odds under the Blue Wave scenario. This led to the initial underperformance of economically sensitive sectors such as industrials, financials and small cap stocks during election week.
Since then, however, the tables have quickly turned as investors suddenly changed focus to prospects for a new vaccine which could help the world to open back up. Last month, three companies reported successful late-stage clinical data for a potential Covid-19 vaccine. AstraZeneca, which announced a successful trial last week was the latest to report positive results. Effectiveness runs as high as 95 per cent for some of the products.
The abrupt pivot from election concerns to vaccine progress shows how quickly market sentiment can change. Recent winners have been value stocks such as banks and energy, which had lagged by a large margin this year.
Going forward, a more balanced investment approach looks like the best bet. The US election and all of its nuances, including a runoff Senate race in Georgia will be resolved in the coming weeks and the market will once again return to fundamentals. Even without a vaccine, the global economy has been slowly gaining back ground from the darkest days of 2020.
In this environment, investors should continue to maintain a healthy balance among asset classes. Innovative companies offering cutting edge products and services against the backdrop of a still challenging macroeconomic environment should continue to thrive. However, lagging sectors such as small caps, emerging markets and cyclical stocks now have a chance to regain their footing.
Bryan Dooley, CFA is Head of Portfolio Management at LOM Asset Management Ltd in Bermuda. Please contact LOM at 441-292-5000 for further information. This communication is for information purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. Readers should consult with their Brokers if such information and or opinions would be in their best interest when making investment decisions. LOM is licensed to conduct investment business by the Bermuda Monetary Authority.