Stock market and economic commentary - November 2020

“No one pretends that democracy is perfect or all-wise. Indeed, it has been said that democracy is the worst form of government except for all those other forms that have been tried from time to time.”

– Winston Churchill

The US Presidential election has been a welcome distraction during the national lockdown amid the ongoing Covid-19 crisis and the continuing drama is a reminder that democracy is a messy business. We must remember however, that democracy and free markets are necessary conditions for the innovation, progress and prosperity we have achieved.

Pandemics such as Covid-19 would be easier to handle if there was no need for elections and if people’s civil liberties could be curtailed without having to ask those same people for their vote. Elections, as in the US this year, would not cost $14 Billion if Vodka or Mai-tai fuelled banquets and party conferences were all it took to elect a leader.

The outcome of the US elections is a good example of just how messy democracy can be. Victory for Joe Biden and Kamala Harris was significant and historic in terms of the popular vote and decisive, but much narrower in terms of the Electoral College.

The so called ‘blue wave’ in which Joe Biden became President and the Democrats controlled both the Senate and the House didn’t quite materialise. The US will have a Democrat President but with his Democrat administration restrained by a Republican Controlled Senate.

This pleasantly neutral political mix will mean that it might be more difficult to get the next support package through Congress but any loss of fiscal stimulus will be compensated for by another monetary boost from the Federal Reserve Bank. A divided government also lessens the likelihood of tax rises and makes it harder to legislate to disrupt high growth sectors, which would have weighed on Big Tech.

Panglossian hardly does it justice and financial markets were a clear winner with equities and technology stocks in particular rising by 5% and more in a matter of days, even before the result was declared. For once political gridlock worked in favour of stock markets.

One of the most important aspects of the US elections, however, is not the balance of power in Washington but a broader impact on democracy and free markets. The election result, in particular the prospect that the next occupant of the White House is a pragmatic moderate with decades of political experience and relationships with Democrats and Republicans alike, sets the tone for the next four years in terms of politics and markets.

Given the challenges, investors will welcome a period of more constructive policies and greater predictability. The fact that there has been no ‘blue wave’ also means that Biden will have to work with moderate Democrats and Republicans in the Senate to get things done, which will limit the risk of significant changes that could impact the economy or upset stock markets. With control of the Senate dependent on the outcome of the two run-offs in Georgia, either outcome, an evenly split Senate with a tie-breaker vote for the Democrats by vice president Harris, or a narrow one or two-vote majority for the Republicans, will encourage pragmatism and moderation and will be good for stock markets.

The ongoing situation in the UK and the Eurozone also provides further evidence, if any were needed, of just how messy democracy can be and a quote by the Third President of the USA, Thomas Jefferson, “The boisterous sea of liberty is never without a wave” seems particularly appropriate.

The Brexit referendum was held on 23rd June 2016 and has weighed on UK businesses, stock markets and people for more than 4 years. This issue has split families, generations, friends and politics, but most agree that the preparation for a leave vote was incomplete and this has led to a lengthy delay as well as a high degree of uncertainty following the outcome of the referendum.

We are now very close to understanding how the UK’s future relationship with Europe will look. Having already revoked our membership of the EU, the Prime Minster, Boris Johnson, set a deadline of October 15th to walk away from talks if substantial progress had not occurred. This deadline has passed and negotiations are continuing. We are now heading for the ‘hard stop’ of December 31st, passed into law by the current Conservative Government, at which point the UK will leave with or without a deal.

Downing Street could hardly have chosen a worse time to be consumed by in-fighting and recrimination. The ejection of maverick adviser Dominic Cummings and his allies lays bare the dysfunction that has for months hampered the Government’s handling of the Brexit negotiations but we are rapidly approaching the point where a deal must manifest or else passing the legislation required on both sides of the Channel will be a significant hurdle.

The repeated defeats in the House of Lords for the Government’s Internal Market Bill demonstrate that there is no guarantee the House will not divide against itself at the crucial juncture, let alone the necessity of all 27 EU countries to agree in passing the legislation. The EU has stated 95% of a prospective deal is complete, with both sides working from joint legal texts. JP Morgan has increased their expectations for the chance of a deal from 66% to 80% this week. This is despite negotiations having to continue remotely, with a Covid-19 breakout in the EU negotiating camp. Michel Barnier is due in London this week after his self-isolation ends, with hopes rising that a deal will be rubber-stamped and ready for the EU summit scheduled for December 10th.

Buried beneath these stories in most news cycles was an important update on a massive intra-Asian trade deal. Made between a number of Asian nations (including China, Japan and South Korea – notably not India), the Regional Comprehensive Economic Partnership is one of the biggest trade deals in history. The agreement took eight years to negotiate, will take a further two years to be ratified by the individual countries, and covers around one-third of the global economy and world population. This is positive news for world trade as a whole but will also help to accelerate the rise and rise of China.

The vaccine news from Pfizer/BioNTech, Moderna and Oxford University/Astra Zeneca has been highly positive. The US and Europe are still in the middle of the second wave of Covid-19 with the US showing record increases in cases across the country and the situation is likely to get worse before it gets better. It is clear that mass vaccination will present major logistic challenges for a variety of reasons and is unlikely to be widely available until the second half of next year.

In the meantime, the coronavirus pandemic and the stringent measures taken to control its spread still pose a threat to the global economy. The economic impact of lockdown restrictions is likely to be around for some time to come with the expected negative impact on economic growth, unemployment and further increases in national debt.

Indeed, Chancellor of the Exchequer Rishi Sunak’s recent spending review painted a scary outlook for the economy with the largest downgrade in economic performance and public finances since the second world war. Sadly, the younger generation will be footing the bill for the cost of the pandemic for years to come. Tax rises are inevitable and with reviews of Capital Gains tax and Inheritance Tax already under way, and the restriction of pension tax relief to basic rate only a distinct possibility, we should all start to think about planning to legitimately avoid the brunt of the tax rises.

So as not to choke off the economic recovery, when it arrives, the worst of the tax rises will be delayed until we are able to see a clear path ahead and in the meantime, keeping the economy going will be the responsibility of policymakers. Central bankers have cut interest rates to the bone and have embarked on powerful quantitative easing programmes. Governments and central banks will continue to do whatever it takes to support their economies through this period of challenge and distress. The current low and in many cases, negative interest rate environment is likely to prevail for a prolonged period of time and force investors to adjust their expectations of risk and reward from their investments. In particular, fixed income investors who can no longer offset the increase in their liabilities and investment risk through government and investment grade corporate bonds.

Our investment horizon is of course longer than a Trump Tweet or a Facebook post and longer than any electoral cycle or two-year pandemic. The good news is not that we have suddenly overcome the divisions and challenges of the past decade, it is that democracy is still the worst form of government apart from all others but it has been resilient. It is not that the vaccines will rid us of Covid-19 and allow us to travel again by year end, it is that the virus responds to vaccines. It is that we have the prospect of turning this calamity into an opportunity by achieving medical breakthroughs in record time and being better prepared for the next, possibly worse outbreak.

We can see how positively the outcome of the US elections, coupled with the news about the effectiveness of the mRNA vaccines has been received by investors. Dr Copper, a reliable barometer for economic activity, is also signalling better times ahead as copper prices reach a 7 year high. People are worried about melt-downs but as more good news begins to emerge, it could be the start of a melt-up phase for stock markets. With the US and some other markets reaching near record highs, healthcare, consumer and industrial stocks look set to join technology and digital stocks in leading equities higher as investors can finally look ahead into next year and beyond with greater certainty. The UK stock market, a Brexit plagued underperformer for the past 4 years, might even play catch up.

As we come out of lockdown 2 and enter a new phase of restrictions, we wish all our clients, families, and friends to stay safe and stay well and we look forward to sharing a brighter future through Christmas and the Festive season and in the year ahead.

Thank you for your continued support and we hope you enjoy reading our regular updates.

Stock market and economic commentary – November 2020

Stock market and economic commentary – November 2020

“No one pretends that democracy is perfect or all-wise. Indeed, it has been said that democracy is the worst form of government except for all those other forms that have been tried from time to time.”

– Winston Churchill

Keith W Thompson

Clarion Group Chairman

November 2020

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