Monthly Market Blueprint: If you are looking at the election, you might be looking in the wrong place.

Monthly Market Blueprint: If you are looking at the election, you might be looking in the wrong place.

Thu 12 Nov 2020

Dear reader,
This note was written mid-day on 3 November, just a few hours before the US presidential election result. Naturally, we were tempted to delay, to get a clearer view of the earth-shattering events surrounding the world’s biggest economy and longest standing democracy. However, we decided to consider that the US presidential election could be inconclusive even for a couple of days and that while it makes for a great story, in terms of asset management the election matters less than first appears.

There are three factors investors should be focusing on: The effects of the second Covid-19 wave and of renewed lockdowns in Europe which will certainty bring both output and earnings downgrades, especially in the service sector. Delays in the US fiscal stimulus and the Fed’s reluctance to proceed with more QE could have a significant impact on both Wall Street and Main Street.

The fact of the matter is that a virus which doesn’t understand the delicacies of neither electoral nor economic cycles, nor fiscal stimuli has ravaged the global economy faster than anything since WWII. Our whole economic case right now rests on a return to normality after the summer of 2021. Missing this timeline could have a significant impact on unemployment, output and of course risk assets, which could at any point see the balance shift from favourable financial conditions caused by Central Banks and Governments towards the dismal economic fundamentals underlying many regions.

Who can empower consumers matters more than who lives at the White House. Voters are already weary after 20 years of stagnated incomes. Unemployment is bound to rise, and companies which haven’t really expanded organically for over a decade are reluctant to invest, and government debt levels are at historical highs. Lacking the ability for discretionary spending consumers have turned to politics. A survey by the University of Michigan suggested consumer optimism is strongly linked to political inclinations. Republican consumers felt increasingly pessimistic about their future as a Biden presidency seemed more likely and vice versa. The same patterns emerged this side of the Atlantic during the Brexit referendum.

But this sort of “partisan consumption” suggests broad-based disappointment to such an extent that no election can in and of itself heal. The world is in desperate search of new growth models and new technologies, investors need to successfully navigate through shifting paradigms for risk assets. More than ever, this is a time for asset managers to put on their thinking hats and for clients to reach out to financial
planners for navigational advice.

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