It’s the end of what’s been a long week. The US election is over bar the shouting (I suspect there will be a lot of that). We’ve got a very promising Covid vaccine coming round the corner. After a burst of euphoria on Monday, we now have all the doubts creeping back in. So now it’s Friday – what have we learned?
Let’s deal with the least important event first – the US election
Monday saw a rare eruption of unbridled optimism in markets and in the world more generally. Monday was a truly explosive day, by the way. If we’d seen those sorts of moves to the downside rather than the upside, we’d be talking about fragile markets and hedge funds blowing up and things like that (as it is, it’s perfectly possible that some funds could have blown up given the sharpness of the moves).
Anyway, a lot of long-term, grinding trends were properly disrupted: value outperformed growth; ordinary boring industries outperformed tech; interest rates went up (a bit). Non-US stocks outperformed US stocks – oil and bank stocks went up, for crying out loud. You get the picture. The question now is: is this a one-off blip, or has the trend really turned? Obviously, the short answer is, “I don’t know”. But it’s useful to think about these things so we can make sure our portfolios are prepared for all eventualities.
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Let’s deal with the least important even first. The US election ended in stalemate, as far as markets are concerned. Before the election, lots of analysts said this would be a terrible thing. After the election, they fell over themselves to explain why “gridlock” was in fact the golden scenario. Analysts talk a lot of backside-covering nonsense, as you may have gathered by now. Best ignore them.
If Joe Biden had won and also had a Democrat senate, you’d have got a great big spending splurge (good for markets), a big tax hike (bad for markets) and probably a less active Federal Reserve, because fiscal spending would have taken the pressure off the monetary side (moderately bad for markets). If Donald Trump had got back into power and had a Republican senate, you’d have got a smaller spending splurge (OK for markets), no tax hikes (OK for markets) and probably a less active Fed for the same reasons (not ideal for markets). Instead, you’ve got political paralysis. So you get a little spending splurge (not great for markets), no tax hikes (OK for markets), and the Fed is left holding the bag, which means more money printing, yield curve control, and maybe even negative interest rates at some point (great news for markets, at least for now).
Looking at these summaries, one thing stands out: they all mean more money getting pumped into the system, the only difference is the timescale and who’s doing the money pumping. That’s why I’m saying that the US election just wasn’t that important from a markets’ point of view. The real game changer (to quote Merryn’s editor’s letter in this week’s issue) was of course the vaccine news.
The rally has further to run
We’ve had time to think about the vaccine and of course we’ve had time for all the spoilsports to come along and raise a dozen other problems with it. Logistically, it’ll be a challenge to vaccinate lots of people. Also some people might be reluctant to take it. And in any case, Covid is still about and appears to be getting worse in the US.As Cedric Gemehl and Nick Andrews of Gavekal point out, European stocks have been among the bigger beneficiaries of the vaccine “rotation”. “Over the month to date, the euro Stoxx index is up 15.8% in dollar terms, easily outstripping the 8.2% gain in the US S&P 500.” So if this rotation isn’t going to last, European stocks (and you could certainly include UK stocks by extension, though they’re not in the euro Stoxx index) will wilt again relative to their US counterparts.
The good news is that it probably will last. Yes there will be hurdles to the vaccine being rolled out. Yes, the latest session of lockdown will cause economic damage. Yes, we might even see further lockdowns early next year if we can’t get Covid down far enough and we’re still rolling out the vaccine. But the point is – and always has been – that there is now a degree of certainty. It’s not deranged to imagine that we might be back to something very close to normal in a year’s time. You couldn’t have said that with conviction less than a week ago.
That’s why the big re-rating – while violent – was perfectly logical. We’ve gone from a very real prospect of a stop-start economy for potentially years, to a return to a healthy economy within a year. That entirely justifies the sort of whiplash moves we saw earlier this week, and more. In short, as Gavekal put it, “while a near-term consolidation is probably, the rerating of Covid-stricken and cyclically sensitive companies still has further to go."
How can you benefit? I mean, if you’ve been reading MoneyWeek for a while, then your portfolio is already likely to be tilted towards the sorts of value stocks and value markets that benefited greatly this week. I’d stick with them. And if you don’t read MoneyWeek – well, why not pick up your first six issues free today?
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