It has been a brutal week so far for global equity markets as the tug-of-war contest has seen the winning marker move decisively away from the side with the healthy company earnings (profitability) announcements, which have so far seen the vast majority of US and European companies beating analyst estimates and the prospect of further fiscal and monetary stimulus; to the side with rising coronavirus infections and the associated tighter lockdown restrictions and uncertainty surrounding next week’s Presidential election.
As such, on Wall Street the Dow Jones has lost 1676 points (5.92%) so far this week while the S&P 500 has fallen 4.48%.
While you may consider that we have recently sounded too sanguine given the comparisons that are currently being made to the increasing number of coronavirus cases and lockdown restrictions, coupled with the indiscriminate selling of equity markets we saw in February and March, it should be noted that today is very different.
Although it is obvious that there will unfortunately be some rolling economic impacts related to localised and/or regional coronavirus lockdowns until a vaccine becomes available, we are today much closer to a vaccine with several pharmaceutical companies due to announce their Phase-3 trial results in coming weeks, which is just one step away from regulatory approval.
In fact, we believe that although the US Presidential election is important, it is progress on a coronavirus vaccine that will have a far greater impact on global equity markets as a vaccine will allow economies to fully reopen and thus speed up the economic recovery.
With regards to the US election, the chances of an uncontested and drawn-out election result have started to increase as the earlier assumption of a Joe Biden (Democrat) win is no longer a foregone conclusion.
This is not to say equity markets favour one candidate over the other, it is just the potential uncertainty of a contested or delayed vote result, especially given the large proportion of postal votes – and many states can’t open the envelopes to verify the vote against the electoral register until next the election day (Tuesday 3 November 2020), let alone start counting them. And it only takes one or two key swing states to put a halt to declaring a winner.
Although it is an open question what a victory for either Donald Trump and Joe Biden would mean for equity markets, in the short-term a Joe Biden/Democrat victory is likely to result in an even bigger fiscal stimulus package than the $2tr+ package that was being negotiated (although we may see tighter lockdown restrictions), plus other major initiatives like infrastructure spending and green energy (which would be positive for equity markets). However, it is also likely that the Democrats will reverse Donald Trump’s tax cuts – which could act as a headwind as higher corporation and income tax obviously reduces company profitability and an individual’s disposable income.
Additionally, a Joe Biden victory is likely to normalise trade relations with China and Iran (and with Iranian oil coming back to the market, we may see a lower oil price), however a Democrat victory is also likely to result in stricter regulatory constraints on business (especially technology companies – and stocks such as Alphabet, Amazon, Apple, Facebook and Microsoft account for a large proportion of the US equity market).
As for the UK, the FTSE-100 falls this week has taken its year-to-date decline to 26%. Our long-term growth portfolios are diversified across a variety of asset classes (equities, fixed interest and cash) and geographies, such as Europe, Asia and the US – and while this diversification hasn’t unfortunately stopped client portfolios from falling, it has helped to protect against bigger losses, as over the same period (since 31 December 2019), a typical my wealth Cautious portfolio is down 4.32%, Balanced down 11.30% and Adventurous -6.52%
Although we appreciate that this equity market weakness is unnerving, we don’t believe long-term investors need to be overly worried. As we have previously warned, the path for equity markets is never smooth – that is why we take a long-term approach to investing, as evidence shows that this leads to better performance as time in the market is more important than trying to time the market.
Additionally, we don’t believe that the recent coronavirus resurgence is likely to cause anywhere near as much damage to the global economy and equity markets than it did during the first half of the year – and the US showed during the summer, their economic recovery continued despite a resurgence of infections. In fact, yesterday’s (29 October 2020) US GDP data showed that the US economy expanded by an enormous 33.1% during the third quarter (almost a mirror-image of the 31.4% contraction we saw during Q2). Also, consumer spending rose 40.7% – no doubt helped by employment market which continues to recover strongly as the weekly US jobless claims data showed continuing claims (which reflects the total number of Americans claiming unemployment benefits) fell to 7.76m from 8.37m last week and 10m the week before.
Consequently, it is important to look through the cacophony of noise, as we believe equities could post some very solid gains in the months ahead as once the US Presidential election is out of the way, the market’s focus will shift to progress on a coronavirus vaccine.
However, we would like to stress that we aren’t naively and blissfully ignoring the current uncertainties (especially as the coronavirus story will still be with us well into 2021) and as such, we are maintaining a defensive stance by holding a slightly higher than normal level of cash (including liquidity funds) in our long-term growth funds.
Investment Management Team