Market Update | A Tumultuous Few Days

IBOSS Market Update November 2020

US Election

Anybody reading this knows as much as we do about Trump’s intentions and how he is going to prove voter fraud on a sufficient scale to reverse the election outcome as it is currently perceived. That rather critical point aside, the equity markets, even before the vaccine news, were feeling pretty chipper, so why so?

What markets liked about Trumpenomics, such as they were, was tax cuts and reduced red tape but these policies had probably gone about as far as they could. What the markets didn’t like was his messy trade war policies, mind games and general lack of consistency – usually conveyed by a series of often obtuse and sometimes plain contradictory Tweets.

What the markets liked about Biden was a potentially massive burst of stimulus. Markets don’t care whether this is monetary or fiscal stimulus, afterall users don’t very often ask their dealers where the gear came from; they only know they want it.  What the markets were not looking forward to were corporate tax increases. With a Biden presidency, but with limited powers to get legislation through (barring executive orders) due to no majority in the Senate, we might be looking at a period of not that much happening and markets are pretty OK with that outcome.

After the undoubtedly dramatic drama finally subsides, the US may enter a period of uneasy political stasis, at least for the next two years.

Covid-19/Vaccine

Both the daily new cases and mortality rates continue to look encouraging in much of South America, including the hotspots of Argentina, Peru and, most notably, Brazil. In Asia, the epicentre remains India, but here too the figures are heading in a positive direction. At the same time, there are signs of case numbers stabilising in much of newly locked down Europe. The country which unfortunately has one of the worst trajectories is the USA, now averaging over 115,000 new cases per day. With the election of Biden the approach to the virus can be expected to have a radical overhaul; indeed, he has already set up a twelve-member coronavirus task-force populated by experts in complementary fields.

The USA may face additional lockdown measures in the coming weeks, which may well hinder parts of the economy in the short term, but not necessarily dramatically effect the longer-term outlook. Since the virus has split America mainly on political party lines, we can expect pushback to any new measures to be substantial and mostly partisan. The countries who have so far dealt best with the epidemic tend to have populations who are united and accepting of government/regional authority direction; currently, the US population could not be further away from this mindset.

Adding to a tumultuous few days, yesterday came the surprise announcement from Pfizer that they have developed a vaccine for Covid-19 which indicated being 90% effective at preventing the disease. There is a long way to go, and there will no doubt be setbacks, but this news was welcomed unequivocally as enormously encouraging. The global stock markets overall went parabolic, whilst Treasuries and gold sold off aggressively.

The real game-changer, however, was the sell-off in the once seemingly impregnable stocks which had been benefitting from being super high Growth stocks and at the same time being seen as insurance via the new WFH environment. Zoom, one of the real darlings of the enforced change in working practices fell over 17%, whilst Facebook and Amazon fell circa 5%

Value Vs. Growth

It is very early days, but records have already been broken for swings in some momentum indices, as well as record divergence in the fortunes of many Value versus Growth stocks.

It’s been very well documented for several years that the Growth style has been outperforming Value and indeed, the difference between the two was still increasing until the vaccine news broke. This move was always coming at some point, but nobody could pinpoint when. It is too early to say if this is a significant rotation, but we feel there is more upside in some of the beaten up and largely discarded names.

It is imperative right now to have a diversified portfolio within an equity allocation. Sectors and geographies which have suffered less than others during 2020, potentially in the shorter term at least, have less upside. By the same token, if the vaccine news continues to be encouraging, then the stocks which have benefitted from being both Growth and WFH winners could now face unprecedented headwinds. The stakes remain unquestionably high, and we now see the virus and its effects as being the drivers of markets and for once taking precedence over any stimulus.

 

This communication is designed for Professional Financial Advisers only and is not approved for direct marketing with individual clients.

Past Performance is no guarantee of future performance. The value of an investment and the income from it can fall as well as rise and investors may get back less than they invested. Risk factors should be taken into account and understood including (but not limited to) currency movements, market risk, liquidity risk, concentration risk, lack of certainty risk, inflation risk, performance risk, local market risk and credit risk.

IAM 339.11.20