Markets rallied last week following the US election amid prospects of a split government, even as COVID-19 cases continued to rise. Near-term we think this unexpected market rally can persist, although volatility is likely to accompany. Long-term, the combination of a fiscal stimulus package, political stability in the US, and stabilization in COVID cases (and a vaccine) should provide tailwinds for further upside. Below we outline three thoughts on the current environment.
1. When it comes to markets and politics, it’s about the Senate, not the President
Markets rallied sharply last week following the US Presidential election as concerns over a “Blue Wave” failed to materialize. While Joe Biden will become the next President of the United States, we think his ability to enact policy change will be limited given (what appears to be) a Republication controlled Senate and a slim Democratic majority in the House. We (and markets) view this as a positive for future market upside, as any new policy will need some level of bipartisan support.
2. Rising COVID-19 cases are impacting markets
Outside of the Presidential Election rising COVID cases in the US are weighing on markets. As cases continue to rise (and hit new highs) concerns over economic growth are increasing. Hospitalization and mortality rates remain low, but as cases continue to increase these could both change.
Biden as President is likely to alleviate some of this headwind on markets, especially given his focus on building a COVID-19 taskforce as a Day 1 priority. In our view, between Biden’s campaign rhetoric on actively working to control the outbreak (which we think he’ll follow-thru on), and a likely vaccine in 2021, economic growth headwinds should be kept minimal. We think COVID-19 market weakness presents tactical investment opportunities.
3. Robust, persistent consumer spending should help support markets
Despite the roll-off of COVID-stimulus this summer consumer spending remained strong in September, and early indications suggest similar for October. While we were concerned about the economic growth implications of a weakening consumer, the current trend suggests that GDP growth in 4Q may be better than expected. Further, consumer confidence remains strong with consumers expressing optimism and a willingness to spend with a reduction in personal savings. Given current trends we think economic activity should remain robust and drive further economic upside, as well as support markets.
Longer-term outlook is promising
The majority of worst case scenarios weighing on markets at the beginning of 4Q20 have failed to materialize. While economic activity will slow from 3Q’s record pace (as expected), the slowdown appears to be less than expected given robust consumer activity. Further, with the US Presidential election creating a gridlock in US politics the headwinds from massive policy reforms seem minimal at this time.
These economic tailwinds, combined with ongoing progress on a COVID-19 vaccine and additional stimulus, make us optimistic in the intermediate to longer-term. While near-term we think volatility will persist and markets will have knee-jerk reactions to political commentary and COVID, we continue to believe that markets will trend higher over the coming years. We view this market opportunistically and continue to see opportunities to strategically deploy capital into both public and private markets.
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A word on risk
All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-U.S. investments involve risks such as currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. This report should not be regarded by the recipients as a substitute for the exercise of their own judgment. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.