Thank God the US elections are nearly over. I woke up on Wednesday morning feeling like the world was going to end but by Friday I was feeling much better, thus revealing my partisan sympathies. That said, the old line about the fat lady singing springs to mind as the legal shenanigans kick off.
Stock markets have been electrified today by the news of Pfizer’s Covid-19 vaccine breakthrough. But even before, they had been rallying strongly as Joe Biden’s presidential victory became apparent, in a slightly mystifying way if I’m honest. Quite why investors think that a gridlocked government led by Biden is good for investors is slightly beyond me.
As the results came in and Biden started pulling ahead, the excellent Felix Salmon wrote a piece on the Axios website which suggested the stock market bounce was more than a bit bonkers. His argument is that in effect the Republicans will hang the Biden presidency out to dry and fight back against job measures to deal with Covid-19 at the state level.
Cue endless numbers of opposing analyses and reports suggesting that Democrat presidents were good for investors. Overall, I think it best to stick to a newly minted mantra in the Stevenson universe which is that ‘politics don’t matter nearly as much as we all think they do’. Share prices are driven by all manner of noise and signals and politics has extraordinarily little impact on many of these deeper drivers, especially as they relate to global liquidity flows and central bank policies.
That said I would wager one or two guesstimates. Biden will be serious about suppressing Covid-19 which I think increases the possibility that he may initiate a much tougher economic lockdown, today’s vaccine news notwithstanding. His ability to boss around states is problematic but when places like South Dakota are experiencing skyrocketing death rates, he might find a more receptive audience even among Republican governors.
But this push to tighter suppression will, I suspect, be followed by a determination to reflate the economy by hook or by crook in the New Year. Even the Republicans in the Senate might be receptive to a reflationary package which will be even more good news for the cyclical stocks that are leading today’s vaccine rally.
As we move beyond this possible scenario, I think we confront an increasingly obvious truth – that monetary policy might have to carry the main burden of reflation. I am not sure how effective said policy will be, but it might well underpin a strong 2021 for US equities. Which brings me nicely to the second order impacts of ever more central bank largesse. The dollar.
Last week I interviewed Michael Howell, of Cross Border Capital for a webinar on bond investing. This research outfit has an excellent helicopter view of global markets through the prism of global liquidity flows. It’s a really interesting interview and ranges widely but is a great primer for any investor looking to work out what might happen next. Clue – Michael is bullish for equities and bearish for fixed income. More importantly he thinks the dollar is set to weaken. If you want to see the interview it’s on YouTube here.
David’s daily blog is available at www.adventurousinvestor.com.
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