Market Update – Wednesday 4th November.

Although the polls and news reports over recent weeks have suggested that it was Joe Biden’s (a Democrat) election to lose, we have warned that the US Presidential election was likely to be tight (simply because, as with voting Conservative or for Brexit in the UK, there are potentially lots of Americans that don’t want to admit to voting for Donald Trump) and as a consequence could potentially be contested and decided in the courts.

While we are hopeful we will get some sort of unofficial election outcome result sooner-rather-than-later, unfortunately there is a very good chance that the outcome of this election will not be known for days, if not weeks – and as such equity market volatility is likely to remain elevated.  In fact, in the UK we have seen the FTSE-100 swing between gains and losses several times today in a 160 point (over 2.7%) trading range.

However, it is worth highlighting that while the Presidential election understandably gets all the attention, the Senate election is just as, if not more, important – and with 35 Senate seats up for grabs we have been focusing our attention on these results.

As we write, the Republicans appear to be on course to retain control of the Senate – and this means we will see either a status quo (if Donald Trump wins four more years), or if Joe Biden wins, his stimulus, tax and regulation plans are likely to be restrained.  As a consequence, we believe that this should be positive for financial markets (both equities and bonds) once all of the Presidential election uncertainty is out of the way (as Joe Biden’s higher taxes and regulation would have been a significant headwind for equity markets, while his big stimulus package would have been negative for bond markets).

While we can’t deny it is very easy to get distracted by all the speculation and commentary of the election results, this week would have been important even without the Presidential election.

So far this week we have had both US ISM (Institute for Supply Management) and Eurozone PMI (Purchasing Managers’ Index) data come in much stronger than expected.

In fact, the US ISM data would suggest that the US economy doesn’t need any further stimulus as the reading came in at 59.3, while new orders jumped from 60.2 to 67.9 – its highest level since January 2004!  Furthermore, employment rose to 53.2 – its first reading above 50 since July 2019.  50 is the line separating expansion and contraction – and so these readings not only show that the US economy continues to expand, but the expansion is accelerating.

Additionally, tomorrow (Thursday 5 November 2020), we have monetary policy meetings from both the Fed and the BoE.

Investment Management Team