| 30 October 2020 |
I hope I find you safe and well.
The clocks went back last week and with it comes shorter periods of daylight.
It is important we all try and remain active and motivated over the coming months, as our desire to get out and about will be curtailed by Covid restrictions and of course the great British weather!
I have no doubt we’ll be as creative as we can to fill our time, and to ensure limited Groundhog Day scenarios.
I always like to try and provide something both relevant and informative in my communications, and in particular information we receive from our investment partners that I think is worth sharing.
The US Election is almost upon us, and with other factors currently influencing markets at home and abroad, I have provided information which I hope you will find to be of interest.
The US presidential election will take place next Tuesday, the 3rd November.
It is commonly believed the combination of policies employed by the next administration could significantly influence the US stock market, disrupting performance. But how likely is this?
Market performance under previous administrations
US equities (S&P 500) delivered roughly the same compounded returns during the Obama years, as under Trump (12.38% annualised for Obama, 13.87% for Trump). Likewise, bonds delivered positive returns in the Obama years (6.85%), and even better positive returns in the Trump years (9.85%).
In short, both equities and bonds thrived under both Obama and Trump. The US dollar also strengthened marginally under Obama and weakened marginally under Trump. The best performing sectors of the S&P 500 under Obama were consumer discretionary, technology and health care. Under Trump, the three best-performing sectors were the same. Under Obama, the two worst-performing sectors were financials followed by energy. Under Trump, the worst performers were the same (Gavekal). These two very different presidents had a marginal impact on markets; therefore, it hardly seems justifiable to agonise over likely results.
The expectation is that the result will be closer than the polls are currently predicting and if, as expected, the result is contested by Trump then you would expect to see some volatility at least in the short term. outperforming, regardless of political environment.
Consequently, it is anticipated that it will be earnings and monetary policy that drive shareholder returns and not the policies of whoever is sitting in the White House.
How Trump and Biden compare on policy
A perfect storm for global markets
Markets have recently reacted poorly to the threat of new lockdowns across Europe; with a pick-up in hospitalisation rates causing a number of policy makers to enforce stricter lockdown measures. This has come against the backdrop of ongoing and fractious Brexit discussions and ahead of the US Presidential Election on Tuesday 3rd of November. We are also hitting the busiest stretch of the earnings calendar in the US and Europe, with poor results from SAP (Cloud/Consulting Business) adding to the doom and gloom of market commentators this week.
Given the above, it is therefore not surprising to see some weakness in equity markets, with the FTSE 100 hitting a six-month low this week. Markets tend to hate uncertainty and this week has been something of a perfect storm, with the US Election in its final stretch and with news on the effectiveness of several vaccines, still several weeks away. As such, many investors are either sitting on the side-lines, or raising cash, and so markets are reacting more violently to the news flow around Covid-19 infections/lockdowns. Although, there are a number of reasons why remaining calm, and why investment managers are on the lookout for opportunities that may present themselves in the next few days/weeks.
- Earnings – Whilst a poor set of results from SAP jolted the market two days ago, it is worth noting that the majority of company earnings, so far, have been better than expected; with 81% of the S&P 500 reporting revenues above analyst estimates. Today sees industry bellwethers such as Apple and Google (Alphabet) report, but so far we have seen strong earnings from a number of core names, such as Unilever, Microsoft and Reckitt Benckiser. Renewed lockdowns won't help Q4 earnings, but certain companies have shown a resilience and an ability to thrive in these uncertain times.
- US politics – this week probably represents 'peak uncertainty' when it comes to US politics, and so it not surprising to see investors run for cover and raise a bit of cash. However, history has shown that the results of the US election make little difference to (longer-term) equity market performance, or indeed the winners and losers at a sector level. Whilst a contested election is a risk, an end to the uncertainty should bring investors back into the market – regardless of who wins.
- Fiscal/Monetary response – one of the main reasons for the market recovery in March was the fiscal and monetary response from the World's Central Bankers and policy makers. In almost every sense, they went above and beyond what was expected at the time, and they did so in record time. This provided the support for the economy at a crucial juncture and the liquidity for markets to stabilise. One of the key reasons for this week's volatility is the failure of the US Congress to agree on a new fiscal stimulus package. However, one must remember that this was never guaranteed, as the Democrats were unlikely to give Trump 'a win' in the closing stretches of a bitter re-election bid. Once the election has passed, talk of a new stimulus package will start again, and with Europe having taken important steps towards fiscal unity this year, there is scope for further support to be provided this year.
- The virus – as we head into another uncertain period of rising infection rates and lockdowns, it is important to remember what is different between now and March / April. Back then, the best estimates for the Infection Fatality Rate (IFR) were as high as 3% - 5%. We didn’t know how the virus spread and we didn't know how to treat it effectively. We were also 7 months further behind in any vaccine development. Whilst there is still a lot to learn, we now have access to far better data on the virus. This includes much lower estimates for the IFR (closer to 0.2% - 0.75%), and demonstrable progress on effective treatment / therapeutics. We also now have 11 different vaccines in stage 3 trials, with results from several of them only weeks away. Does that mean we are close to beating the virus? Not yet. A vaccine will take time to be produced and distributed and the recent uptick in cases show we have not yet found a way to effectively limit the spread. However, we are in a far better position than we were 7 months ago and many of the worst case scenarios that were being predicted in March, have been proven wrong.
- Positioning – Whilst not immune from the selloff in March, most equity positions held up better than the wider market due to underweight positions in certain economically sensitive sectors, such as Retail, Travel, Oil & Gas and Banks. Likewise, exposure to defensive sectors such as Healthcare, Consumer Staples and US Tech outperformed, as their business models were better suited to lockdowns and a move to work from home / online retail. As we head into the latest bout of volatility, we expect most investment houses to be similarly positioned, having resisted the temptation to go back into those more cyclical sectors, and having added to those companies that outperformed earlier this year.
We are entering a difficult stretch of the calendar, with Covid-19 infections rising, the threat of renewed lockdowns and political risk in the air. However, we should be mindful of what has transpired since the dark days of March, with both the policy response and economic recovery far exceeding expectations. Whilst a return to lockdowns will undoubtedly blunt the economic recovery in the short term, low interest rates and abundant liquidity should provide a level of support for equity and credit markets, and investment managers will be using any correction to top up exposure to quality businesses that they intend to hold for a long time.
All further highlights the importance of having a diversified investment portfolio which invests across many different asset classes, as a well-designed investment plan ignores short-term market movements because it is focussed on the overall outcome, rather than the day-to-day ups and downs.