Early last week everyone knew what would be bullish for the market: certainty. A full-on Blue Wave would have been great – perhaps a bit less business-friendly than a second Trump victory, but think of the stimulus! Free money fountains galore. A Trump win would have been pretty bullish too. No Covid lockdowns, no tax rise and no pesky ramp up in regulation.
Everyone also knew what would be just awful: stalemate. If the whole thing ended up long and drawn out, and was decided by controversial postal ballots, the loser would contest and markets would not be happy. A tight result, said a note from Julius Baer, (which reflects what almost everyone else was saying too) would be the “worst scenario for the markets . . . risky assets will clearly not react well”.
Credit, then, to investors for proving the consensus completely wrong. It turns out paralysis is just another kind of bullish certainty. The tight, contested election is likely to generate political tension for some time, and markets are up. This is not just a goodish outcome, say analysts at Gavekal in a note (which reflects what everyone else is now saying too), “it is probably the best outcome for US risk assets”.
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Despite the drama, democracy is working in the US
Right. This all sounds a bit ridiculous, but the arguments aren’t bad. First and most importantly, democracy is working in the US – there has been no major violence, no evidence (so far) of material voting fraud and a pleasingly high turnout. Just as impressively, the system has shown how well it works by making sure that neither of the not-very-impressive candidates has won an impressive victory.
Second, the market has made up its collective mind on what will happen next – and the market is probably right. It expects a Biden presidency and a Republican Senate, a pleasantly neutral mix which should mean a slightly smaller fiscal stimulus than might have been expected with a full-on Blue Wave – more like $1.5trn than $2.2trn says Pictet Asset Management’s Luca Paolini – but also not much in the way of tax rises. Biden’s plan to raise corporation tax to 28% should fall by the wayside pretty quickly.
It could also mean more of a bipartisan approach to the things the parties agree on. Think infrastructure spending (sorely needed in the US as anyone will know who has used both an American and a Chinese airport in the past few years). There will be less talk of socialism: the result surely shows that Americans aren’t mad for this kind of rhetoric. There may possibly be some better messaging around the pandemic and trade policies might be a tad less confrontational, or as Gavekal carefully put it “less disruptive for US multinationals, importers and exporters”.
Finally, the prospect of a vast spending programme receding has meant the pre-election rise in Treasury yields – discounting the change to higher inflation sooner rather than later – has rolled over. That’s good for equities in the sense that lots of valuation models refer to Treasury yields – the lower they are, the higher equities can go.
The result of all this newly-deemed positive news? The S&P 500 index was up nearly 2% on the day after the election and the Nasdaq 2.6%. Pretty much all sectors moved up – for once this wasn’t just about tech – and so did most global markets.
Politics may not be the main driver of markets
That’s nice. But let’s stop and think about it all a little more. If every possible political outcome is good for markets, might it be that in financial terms at least, politics is no more than sound and fury – and that the real driver is elsewhere?
Well, yes it might. The real drivers of equity markets are the same as they have been since the beginning of the year – the speed of recovery from the pandemic, the knowledge that a vaccine is on the way and, crucially, the seemingly endless and aggressive support from central banks.
The pandemic will end. The policy-created recessions will end. And more stimulus is coming. It’s worth remembering amid the mutterings about the US president being the most powerful man in the world, that even he has to ask other politicians if he can spend money. If the Republicans hold the Senate, they can be expected to put a damper on Biden’s money fountain.
Central banks just do what they like these days. That’s mostly interest rate slashing and money printing. However you interpret the result of the US election, it is clear that more monetary and fiscal stimulus is on the way and that as Christopher Wood of CLSA puts it “America remains on the path to the implementation of Modern Monetary Theory. The only issue perhaps is whether this is explicit.”
What matters is the fact that monetary policy will remain easy and probably get easier from here.
So what do you do? Learn the obvious lesson from this week: that all forecasts – from pollsters as well as equity analysts – should be used for the mildest of reference only.
There are risks here. Trump’s legal challenges might turn out to have legs. US tech stocks are still horribly overpriced. And the new complacency over tech stock regulation – the idea that paralysis will prevent it – may be misplaced: a divided US will need someone to gang up on and everyone loves to hate big tech.
So take this time to rebalance a bit. With the Nasdaq up 10% in a week, now is as good a time as any, and remember that however bored you are with me telling you this, price does matter. So be invested in Japan, where to the joy of my old colleagues in the Japanese equity market the Nikkei index has finally regained its levels of 30 years ago. And do not write off the UK. Political chaos is hardly unique to us and while we might not have the huge tech giants of the US and China, we have certainty of sorts coming, with the Brexit transition period is nearly over, and we have an awful lot of cheap stocks.
• This article was first published in the Financial Times
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