Wellesley WeeklyWatch – Market nerves shaken by second lockdown
03 October 2020
Second wave strikes Europe
Last week’s data was defined by mounting COVID-19 case numbers across Europe. Although the prospect has been stalking markets since the summer, last week there was a sense that the second wave had appeared in earnest, casting a long shadow over indexes. Fresh restrictions were implemented in France and Germany, with England to follow suit on Thursday with a second national lockdown.
“Perhaps we have all been too complacent with respect to a second wave”, notes Mark Dowding of BlueBay Asset Management, Co-manager of the St. James’s Place Strategic Income fund. He adds, however, that European countries are well supported, such as with the EU’s recovery fund, as well as by central banks and through other government tools. In fact, Christine Lagarde, President of the European Central Bank, last week hinted at a new round of economic stimulus later in the year. However, referencing Europe’s rising case numbers, she warned that the risks are “clearly tilted to the downside” for the continent.
European economies are still licking their wounds, and rising COVID-19 case numbers threaten to derail the eurozone’s recovery. On Friday, official figures showed that the region grew 12.7% in the third quarter. But due to the resurgence of the virus and the corresponding lockdown measures, economists are now downgrading their projections.
The second wave also struck the other side of the pond – on Thursday, data revealed the biggest single-day jump in COVID-19 cases in the US since the start of the pandemic. Although an increase in testing accounts for some of that trend, the White House infectious disease adviser said last week that a large number of states were “going in the wrong direction.”
US election draws closer
Also weighing on markets last week was the US Presidential Election, which is due to take place today (Tuesday 3rd November). Investors remained on edge – it was the worst week for global equity markets since March, with stock indices in Asia, Europe and North America all falling in the final few days before the US goes to the polls.
The uncertainty surrounding the vote has been a source of market volatility this year. Nervousness about the result increased last week; the VIX ‘fear index’, a measure of expected volatility in the US stock market over the next month, jumped to double its long-term average.
The largest risk to investors in the short term is a contested result. The resultant turmoil would spook markets in the short term, even though Biden’s solid lead in the national polls makes that outcome less likely.
However, investors should remember that, historically speaking, there hasn’t been a great difference in stock market returns whether Democrats or Republicans are in power. And fund managers base their decisions on the long-term prospects of the companies they invest in, rather than short-term political shifts.
Jim Henderson of Aristotle, Manager of the St. James’s Place North American fund, while discussing the 2020 election, says:
“It has not affected our investment landscape one bit. Quality businesses adapt. They adapt to whatever landscape they are faced with over long periods of time. Those things change very slowly, and the businesses that we invest in will continue to adapt, continue to prosper.”
Technology posts strong earnings
In more positive news for markets, large technology companies posted strong quarterly results last week. While this failed to soothe market nerves around COVID-19, lockdowns and the US election, it demonstrates how certain sectors can thrive through volatility.
On Thursday, results were released for four of the biggest names: Alphabet (which owns Google), Amazon, Apple and Facebook. Their combined sales were up 18% in the last quarter, compared to last year. Their post-tax profits were also up by 31%.
Technology companies have prospered throughout the pandemic, thanks to the fact that people are spending more time online, and businesses are using their services more extensively.
That said, Big Tech is still facing major challenges. Antitrust regulators are acting against Google, arguing that the company uses its monopolistic position to stifle competition. And social media CEOs were challenged in the US Senate last week over how they moderate content on their platforms, as well as how that content affects politics.
This week, however, it will be politics that affects content. Social media users will be waiting with bated breath for the posts of one high-profile Twitter user as he reacts to the vote count this week…
We haven’t got long to wait until we find out who will be holding the keys to the White House for the next four years.
Looking at predictions, Biden is still ahead in the polls, but they were notoriously wrong in 2016. The US stock market, meanwhile, has got a good track record of getting it right. If US equities were up in the three months leading to election day, the incumbent party won in 19 of the last 22 presidential elections.1 Given the performance of the S&P 500 since August, that suggests victory for Trump. Yet betting markets are moving in the opposite direction, putting Trump’s chance of re-election at just 35%, as at the middle of last week.2
It could be that betting markets have put all their eggs in the basket for a decisive win against Trump, repeating the mistake they made about Hillary Clinton in 2016. Or it could be that financial markets believe that Biden’s lead reduces the chance of a contested result, which would be more negative for stocks (at least in the short term) than fears of higher taxes or greater regulation under a Biden presidency.
But in the long run, does it matter? Whether the US ends up with a divided government or a clean sweep by either party makes little difference to the long-term performance of the stock market. Since 1929, one party has controlled both chambers of Congress and the presidency in 45 of those years. The S&P 500 rose 7.45% on average during those years. Over the remaining years of a split government, the index rose an average of 7.26%.3
Whatever short-term market reaction we see in the aftermath of the result needs to be kept in the context of our longer-term plans. It’s important investors don’t overreact – but it is worth reviewing your portfolio to ensure it is diversified by asset class, country and sector. By doing so, you will be in the best position to ride out any volatility, and exploit opportunities, created by the election outcome.
Source: Financial Express; data shown for S&P500 Total Return Index. Past performance is not a guide to future returns.
1,2 Schroders, October 2020
3 Dow Jones Market Data, October 2020
In the Picture
Who will be sitting behind the famous Oval Office desk come Wednesday this week?
Ahead of the US Presidential Election tomorrow, Chris Ralph, Chief Global Strategist at St. James’s Place, has shared his thoughts with us about the latest polls, the importance of the swing states and the likelihood of a delayed result.
The Last Word
“If anything could have pulled me out of retirement, it would have been an Indiana Jones film. But in the end, retirement is just too damned much fun.”
– The late Sir Sean Connery on the importance of enjoying your golden years.
The information contained is correct as at the date of the article.
Aristotle and BlueBay Asset Management are fund managers for St. James’s Place.
The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place or Wellesley Wealth Advisory.
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