Wellesley WeeklyWatch – Markets shrug off Capitol Hill chaos

12 January 2020

Stock Take

A volatile revolt

Republican protesters stormed the buildings on Capitol Hill in Washington DC following a rally in support of President Trump last Wednesday – causing unprecedented chaos and deadly destruction within the space of a few hours, while Congress was in session. This radical incident was a telling sign of the deep-rooted friction and volatility that have tainted Trump’s term in office.

As disturbing an episode as it was to watch, this act of lawlessness has done precisely nothing to negate the election result. Trump posted a video on Twitter on Friday, acknowledging – for the first time – that Joe Biden will indeed be his presidential successor, claiming that he was now set on “ensuring a smooth, orderly and seamless transition of power”. However, true to form, when Trump subsequently tweeted to announce that he wouldn’t be in attendance at Biden’s inauguration on 20th January, his account was permanently suspended, with Twitter citing a risk of incitement of violence.

Uninhibited markets

Despite the dramatic scenes on Capitol Hill, markets remained surprisingly unscathed – in actual fact, all three of Wall Street’s leading benchmarks reached record highs the following day. News events like these are very much in the spotlight as they’re playing out; however, it’s the long-term forecast plus the impact of Biden’s administration on markets that are key to investors.

Market observers considered this very question in the lead-up to the November elections. They weighed up Biden’s campaign’s objectives regarding Big Tech, the environment, and the need to ramp up support for the COVID-hit economy.

Last week’s run-off Senate election in the state of Georgia occurred because none of Georgia’s candidates for the two seats in the Senate won over half the votes in November – this time, the two Democrat candidates for the state were triumphant. Democrats now control not only both houses of Congress but also the office of president (called a ‘Blue Wave’ by commentators). The administration is therefore more likely to meet some of its goals.

The many challenges that could restrict the Biden administration will, no doubt, dictate what the ‘Blue Wave’ means for markets. The handling of the energy sector, banks, and Big Tech might be diluted due to state-level opposition, suggests Mark Dowding of BlueBay Asset Management, co-manager of the St. James’s Place Strategic Income fund – likewise, tax rises could also prove to be demanding. And, of course, the response to COVID-19 could see more long-term plans delayed.

“We would rather characterise recent events as more of a Blue Ripple than a Blue Wave,” suggests Dowding.

Markets had a positive start to the new year, although Wall Street began 2021 with its biggest sell-off since October, due to anxiety around the Georgia election. The MSCI World Index measures the share prices of sizeable businesses across the globe, and last week, it exceeded its personal best. UK markets also enjoyed a buoyant week – shares in its largest companies saw their best week since November 2020 (when the first vaccine successes made the headlines) – and European stocks followed suit.

The race to vaccinate

As the first week of 2021 came to a close, something resembling normality started to take place, notably in the shape of mass vaccination programmes. 2.2 million people have received their first does of the vaccine in the UK, and Moderna’s vaccine has now been approved for widespread use. Researchers also announced last week that the Pfizer-BioNTech vaccine is effective against mutated variants of the virus that were discovered recently in the UK and South Africa.

Amidst this positivity, the human and economic loss surrounding COVID-19 is a heavy price to pay. Many European countries have reverted to yet more lockdowns in a bid to stem an increase in cases. The US employment market is feeling the strain once more too – according to figures last week, it lost 140,000 jobs in December.

Markets will continue to feel the ravaging effects of the pandemic throughout this year, in more ways than one. Dramatic changes are already taking place in sectors such as e-commerce – before the pandemic, approximately 20% of UK retail sales occurred online, for example, but now the figure is closer to 40%, notes Keith Wade, Chief Economist at Schroders, a fund manager for St. James’s Place. He adds: “It’s brought forward the trend towards online shopping by about five years.”

This type of shift will certainly make 2021 one to watch. Your investments are in a good position to maximise from economic changes such as these, within a diversified portfolio, and have a buffer against market swings than if they were concentrated in one area. This coming year will have plenty of twists and turns, but, thanks to recent advancements made in the fight against COVID-19, we can firmly hold onto our optimism.

Wealth Check

Lockdown 3.0 came into force on Tuesday, signalling another questionable year for the UK self-employed.

“The self-employed are often more susceptible to an income shock than employed individuals, whether it’s because new contracts fail to materialise due to unprecedented nationwide or global events hitting the economy,” commented health and protection insurer, The Exeter.

The precarious nature of being self-employed has been antagonised all the more by the coronavirus – 91% of freelancers say they are concerned about the financial impact of COVID-19 on them and their business.1

Despite the financial insecurity felt by the self-employed, only one in 10 self-employed earners have income protection, according to recent research by The Exeter.2 A shortage of income protection – which pays out if you are unable to work because of injury or illness – can have short- and long-term effects on financial well-being.

More than 50% of respondents reported that they would depend on personal savings were they to suffer an abrupt loss of income.3 But perhaps more concerning is that the research showed that a lot of self-employed workers are saving less than £50 per month, leaving them at risk if they have a mortgage to pay or a family to support.4

In the long term, the liberties that many self-employed people usually enjoy need to be weighed up against the downsides of a lack of sick pay provision or company benefits, such as employer pension contributions and redundancy payments. Shifts in both the amount and regularity of income can influence how self-employed earners build a pension.

Over half of self-employed workers told The Exeter that they were worried their retirement income wouldn’t meet their needs, and more than a third were worried their earnings could be affected through illness.5

In the worst-case scenario, income protection can help maintain regular pension contributions or mortgage repayments.

“This is an incredibly difficult period of time for the self-employed community, and the myriad of uncertainties faced by freelancers and limited companies underscores the importance of income protection,” said Paula Read, Head of Protection Proposition at St. James’s Place.

“Our financial well-being can be improved by having the right cover in place should the worst happen at the wrong time. It’s a no-brainer, particularly for the self-employed.”

Sources:

1 Survey of 941 freelancers by IPSE (Association of Independent Professionals and the Self-Employed), January 2021.

2/3/4/5 ‘Ill Prepared 2020’, survey of 3,000 self-employed individuals, The Exeter, September 2020

In the Picture

In retrospect, one of the most remarkable changes for investors in 2020 was the difference in inter-sector market performance. For instance, among large US companies, traditional energy businesses have ebbed. On the other hand, large technology companies have delighted in strong returns, ever since the pandemic broke out.

The Last Word

“It’s one of the few things we have ever agreed on.”

– President-elect Joe Biden on his predecessor’s decision not to attend his inauguration this month.

The information contained is correct as at the date of the article.

BlueBay and Schroders 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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