Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
A week may be a long time in politics, but this week was not long enough to fully contain America’s presidential election. After a much closer contest than the polls had forecast, markets have been forced to align with a new reality and not the one they were probably expecting.
Tuesday’s election night did reveal one thing. It showed the Democratic “blue sweep” of America the pollsters had been predicting wasn’t going to materialise. For that to have happened, the bellwether states of Ohio and Florida would probably have had to tip Mr Biden’s way, and they didn’t. Texas also slipped away from the Democrats, dashing hopes a high turnout might have turned the Lone Star state blue.
Key swing states in the north – importantly, Michigan and Wisconsin – eventually went Biden’s way on Wednesday, in a mirror image of the red wave that swept President Trump to power in 2016. Even so, the prospect of a narrow win for the Democrats but four million more votes for Mr Trump than in 2016 go some way to illustrating just how divided a nation America has become.
In Congress, the Democrats held on to their majority in the House of Representatives but failed to wrest the four seats they needed to gain control of the Senate. While there’s still a possibility Democrats could win runoff races in Georgia leading to a deadlocked chamber, America now faces the real possibility of having to operate under a divided government and accepting a smaller economic stimulus bill than might otherwise have been the case.
Positively, from the point of view of markets, this outcome would effectively take big tax rises under a Biden-led government off the table. It would also make stricter regulations for big business, including technology companies, much less likely than under a Biden landslide.
Perhaps because of these factors, markets held up well to the onslaught of this election. Stocks and bonds rallied together last week, as some of the heat of the battle dissipated1. Healthcare stocks led the advance as markets looked forward to a more favourable regime of healthcare benefits under a Biden administration2.
The VIX Index – a measure of how volatile investors expect the US stock market to be over the next 30 days – tailed off in the immediate aftermath of Tuesday’s historic vote, having touched its highest levels since June in the lead in to the presidential race³. Despite the legal challenges already launched by the Trump campaign, the indication is that markets have become somewhat less concerned the election will lead to a further period of turmoil.
For now, as America awaits a stimulus bill, the focus is likely to return to the US Federal Reserve’s ability to provide more support for the economy through yet easier monetary policies. That’s a positive for bonds as well as equities, and probably another reason why both have performed well over recent days.
Under more normal circumstances, the main focus this week might have been the start of a month-long lockdown in England. Non-essential service providers are set to remain closed until 2 December, further pushing back the recovery for airlines and businesses in the retail and hospitality sectors.
The government’s announcement had been heavily trailed; not so comments from the Cabinet Office minister Michael Gove indicating the lockdown could be extended beyond the December deadline⁴.
The Chancellor was quick to announce extensions to the government’s furlough scheme for employees throughout the UK, this time until the end of next March⁵. The Bank of England’s decision Thursday to extend its asset purchases programme by a larger-than-expected £150 billion was clearly designed to help keep interest rates as low as possible, vital at a time when government borrowing to support workers and businesses is growing rapidly⁶.
There was no breakthrough for post-Brexit trade talks in Brussels this week, negotiators emerging to confirm that fishing rights and state aid for businesses are still the main sticking points. It’s understood negotiations will resume in London this coming week.
That the EU and the UK are still talking and plan to talk some more implies the UK, as well as the EU, are still seeking a deal. Moreover, it seems almost inconceivable that the present UK government would consider the main outstanding issues important enough to relinquish a free trade deal. Expect talks to go to the wire.
Much like the US electorate, stock markets remain split down the middle. After almost a year of coronavirus, growth stocks – those able to increase their earnings irrespective of the economic environment – have held the lead. Shares offering good value have lagged behind, waiting for a big push upwards for the economy as a whole. In view of developments this week, both here and in the US, the status quo may not be under threat anytime soon.
However, in uncertain times such as these, it makes sense for investors to continue to cast a wide net. Multi-asset funds can work well for investors seeking an exposure to financial markets but with less risk than a fund investing only in equities.
The Fidelity Select 50 Balanced Fund is an interesting example, because it invests most of its assets in funds taken from Fidelity’s Select 50 list. It is highly diversified across countries and contains investments in equities (51%) bonds (34%) and cash. An annual charge of 1.24% covers the fund’s fees as well as the charges of the underlying funds.
More on Fidelity Select 50 Balanced Fund
1 Bloomberg and US Department of the Treasury, 05.11.20
2 S&P Dow Jones Indices, 05.11.20
3 Cboe, 05.11.20
4 BBC News, 02.11.20
5 Gov.UK, 05.11.20
6 Bank of England, 05.11.20
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Select 50 is not a personal recommendation to buy or sell a fund. The Fidelity Select 50 Balanced Fund uses financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Currency hedging is used to substantially reduce the risk of losses from unfavourable exchange rate movements on holdings in currencies that differ from the dealing currency. Hedging also has the effect of limiting the potential for currency gains to be made. The Fidelity Select 50 Balanced Fund investment policy means it invests mainly in units in collective investment schemes. There are just a few fixed limits for the three core elements in the fund. These are 30% to 70% for shares, 20% to 60% for bonds and 0% to 20% for cash. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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