In this week’s market update: the last days before a watershed US Presidential election; earnings season serves up a torrent of big company results; and the first sign of whether the US economy bounced back in the third quarter.
There’s so much for investors to focus on this week, but there’s no doubt where to start. We are just seven days away from what promises to be a pivotal US Presidential election. Will Donald Trump become the first President since George Bush senior to fail to secure re-election after his first term? If Joe Biden does win the White House, will he be supported by a Democratic majority in the Senate to add to the party’s lead in the House of Representatives?
This matters because the former Vice President has an ambitious agenda of fiscal stimulus and tax rises in his back pocket. Whether he can actually deliver it, were he to win, will depend on whether he presides over a unified or a divided government in Washington. The US system makes it hard for a President to push through his programme for good reason. It protects the Republic against mad, bad or dangerous commanders in chief. The downside is that gridlock is the default condition in the US capital.
The difference between the likely fiscal stimulus in the various possible outcomes next week is significant. Fidelity’s macro team estimates that a Democratic blue sweep, with a big majority in the Senate, could result in an $8trn programme of spending over four years. That might fall to just $5trn in the event that the Democrats only scrape home in the Senate, perhaps relying on the Vice President’s casting vote. The odds suggest this is the most likely outcome.
Were either Trump or Biden to win the White House but fail to get the support of Congress then the spending might be capped at just $2-3trn over the next Presidential term. That’s a big spread of outcomes, with meaningful implications for markets.
A big fiscal stimulus would not only boost the economy in the short term, reducing unemployment and raising consumer confidence, it would also most likely change the leadership of the market. The long primacy of growth shares over value might come to an end, big companies might cede leadership to smaller ones, financial assets might look less appealing to real assets like commodities, the dollar might decline, making non-US and emerging markets look more attractive.
As importantly, a big fiscal programme would put pressure on the Federal Reserve to facilitate the big increase in government debt by artificially suppressing interest rates below the rate of inflation. Only this would make the ongoing financing of the deficit affordable and lead to the eventual reduction in real terms of the debt burden.
It is what happened in the 1940s when massive war spending was funded by interest rates stuck at 1% even as inflation started to take off after the deflation of the Depression years.
So, the election next week is a big deal. Currently the polls and betting markets are pointing to a clear Biden win but the experience of four years ago suggests that it would be unwise to count on this. The leadership has narrowed in recent days and Donald Trump defied the odds in 2016. He might yet do it again.
Whether we will actually know the result next week is far from clear, though. That’s because some of the key battleground states will not even start counting mailed in votes until election day. It may take days, even weeks, for a decisive result to emerge.
Time is running out for the news-flow to change voters’ views, and indeed something like 60 million voters have already cast their ballot, with voting by post and at early voting centres well up on previous elections because of the Covid pandemic. One thing that might swing opinions, however, will be this week’s first cut of third quarter GDP data.
The expectation is that there will be a sharp reversal in growth from the 9% fall in GDP between April and June to perhaps a 6% increase from July to September. With the economy being the current President’s trump card (forgive the pun), a big rebound could hardly be better timed. We’ve already seen the return to growth in China, with more expected next year. Were the US to get back on a growth tack then the market’s V-shaped optimism might seem justified.
That’s not to say, though, that there won’t be air pockets along the way. Yesterday provided one of those, with the US market falling by as much as 2.6% at one point before recovering to close down 1.8%. The explanation focused on rising Covid cases and ongoing differences in Congress over a new stimulus package. But in reality these are just rationalisations for a swing in sentiment as investors question whether the market has bounced too far too fast.
Markets in Asia followed Wall Street’s lead overnight with drops in Japan, Korea and Australia.
The other big focus for investors this week is earnings season, which is really in full swing as the number of results announcements cranks up. Thursday really will live up to a Super Thursday tag this week as four of the five biggest companies in the US, including some of those most influential in shaping opinions in the run up to the election, announce their earnings.
Apple, Amazon, Facebook, Alphabet and Twitter all unveil figures for the third quarter that day, with Microsoft having already reported on Tuesday. When you consider that the top five companies in America accounted for a quarter of the bounce back from the market slump in February and March and represent more than a fifth of the value of the US stock market, this is an important week.
The good news so far is that with around a quarter of S&P 500 companies having already reported, more than 80% of them have beaten estimates by an average of 18 percentage points. In fact, that growth (or more accurately decline) estimate for the third quarter as a whole has improved from -21% at the start of earnings season to -17%. That will probably narrow further and it won’t be long before favourable comparisons start to lead to year on year growth again.
And it’s not just tech that’s reporting this week. After Barclays’ better than expected results last week, which incidentally has sent all the sector’s bombed out shares sharply higher in recent days, there’s a wave of other banks reporting this week in the UK and in continental Europe.
Pharma is also in the spotlight, with numbers from Novartis, GlaxoSmithKline and Sanofi. And energy too is in focus with results from BP, Shell, Total and ExxonMobil. The list of other companies reporting this week is too long to list in full. Suffice to say that we will get updates from Ford, VW, Kraft Heinz, Anheuser Busch, General Electric, Credit Suisse - and on and on it goes. A good week, you might say, to bury bad news.
Central banks may struggle to secure a place on the news agenda this week, but meetings of the ECB and Bank of Japan are worth a mention. The ECB meets on that Super Thursday and is expected to leave rates on hold despite the string of challenges facing the European economy at the moment - deflation, a second wave of Covid infections and further lockdown measures in Italy and Spain, looming recession and let’s not forget Brexit, which is a problem on the other side of the Channel as well. Most ECB watchers think the next move will come in December, with additional stimulus almost certain.
China has been off the radar for a few months thanks to its greater success in bouncing back from the coronavirus. But relations between the US and China are very much on the agenda ahead of the election, with Vice President Mike Pence on a tour of the region, including India and Indonesia, but pointedly not China itself.
Some of the longer-term plans for China may well start to emerge during this week’s Fifth Plenum meeting of the Communist party leadership. The next 5-year plan is due to be drafted as well as broader plans for the next 15 years, much of which could well be under the leadership of Xi Jinping who has spent recent years shoring up his position as the most powerful Chinese leader since Mao.
The growing power and influence of China has been confirmed this week by news that financial technology company Ant Group is to raise more than $34bn from its upcoming IPO, topping Saudi Aramco as the biggest-ever flotation. The company, controlled by Alibaba founder Jack Ma, will have a dual Shanghai and Hong Kong listing with first dealing expected on November 5. Investors will hope for fireworks, no doubt.