27 October 2020
The effect of the US election result on markets is up for debate
Last week saw Donald Trump and Joe Biden duel for the last time – with the election just over a week away. The debate was more controlled than their first meeting (possibly helped by their microphones being turned off to stop them talking over each other), with viewers being impressed by the performance of both candidates. Analysis company FiveThirtyEight also found that the final debate didn’t have much of an impact on how favourably people viewed either contender.
Americans who haven’t already voted will go to the polls in a little over a week to decide whether Trump will get another four years or whether the keys to the White House will be handed over to Biden. As it stands, the challenger is still leading the national presidential polls, but as the BBC points out, these aren’t a full-proof way of predicting the result – as Hillary Clinton found out in 2016.
The stimulus deal stalls again
Another factor that investors are keeping a keen eye on is the hoped-for stimulus deal, something that has so far failed to get off the ground. There were some reports of progress last week, but by Friday the two parties had resumed finger-pointing. However, many investors believe that the deal is likely to pass after the election regardless of who wins, given that Democrats and Republicans agree on the need for more support.
Investing through any election can be a nerve-wracking experience, not least when the stakes are this high. But neutrality and a long-term outlook are an investor’s biggest assets when political risk elevates market volatility. Beyond the headlines, there’s plenty of historical data showing that annual US stock market returns are generally positive during presidential election years, and that returns are broadly similar during the terms of both parties.
Brexit agreement looks likely next month
Meanwhile, coming back across the pond, and Brexit trade talks have entered the final straight. Talks resumed in London last week, having passed the 15 October deadline set by Boris Johnson. Press reports suggest that the two sides are targeting an agreement in November.
Politics joins COVID-19 as major influence on markets in 2020
It may seem as though political events are reigning supreme on markets at the moment – and that’s because they are. Events such as the US election, Brexit trade talks, and the relationship between the US and China have combined with the impact of COVID-19 to cause high levels of uncertainty.
This is evidenced by the fact that the third-quarter earnings season has garnered less attention than it usually would, suggests Chris Ralph, Chief Global Strategist at St. James’s Place. “Geopolitics has had a greater influence on markets over recent years than at any time during my career,” he notes.
Still, there were some interesting third-quarter results to take in last week. On Friday, European equities edged higher after some better-than-expected results from banks like Barclays and Nordea. But elsewhere, many companies are showing the strain, especially in sectors like hospitality and travel, which have been hit hard by COVID-19.
Investors can probably expect more of this deviation as the year draws to a close in the challenging environment of the pandemic, says Mark Holman of TwentyFour Asset Management, co-managers of the St. James’s Place Strategic Income fund. He expects that investors in corporate bonds will have the chance to add new names to their portfolios as companies turn to the market to meet their borrowing needs:
“Along with more frequent issuers, especially the banks and insurers, we would expect more names with less resilient credit stories to try to access the market, as for this latter group the market has only recently opened up. For bond investors, some of these might represent opportunities to add some pro-cyclicality to portfolios, whereas others should come with a strong health warning.
Unlike the past six months, where nearly all new deals performed well in the secondary market, from here on that is far from guaranteed. Expect winners and losers.”
Regulators take aim at Google
Early last week, the United States Department of Justice (DOJ) filed an antitrust lawsuit against Google, accusing it of suppressing its competition unfairly. The company is a “monopoly gatekeeper for the internet”, say lawyers for the DOJ, who are trying to force the technology giant to change.
Given how dominant Google is in internet search and digital advertising, there’s been plenty of speculation that such a move was in the works. But what does it mean for investors who own its parent company, Alphabet? Hamish Douglass of Magellan, Manager of the St. James’s Place International Equity fund, which owns Alphabet argues:
“While these threats need to be monitored, it’s unlikely that regulators will permanently reduce Google’s competitiveness in search or digital advertising,” argues “Alphabet’s strong presence in a wide range of products and services [such as artificial intelligence or drone delivery] give it a strong competitive advantage.”
He adds that the fact that the its core product, Google, has become a verb like ‘hoover’ or ‘photoshop’, is evidence of how widespread and essential it is:
“Alphabet’s growth rates are likely to fall over time. But any company that owns a household verb doesn’t need much to go right for it to deliver bumper returns for its investors for many years.”