In the fallout of one of the most volatile american elections ever financial markets
did something very strange, they rose, and rose to new record levels, again.
This would be unusual during even a normal election, where most investors tend to sit
back and wait for the dust to settle but it is especially strange in 2020.
Joe Biden, who everybody is at least 90% confident will be the next president has spoken very
openly about plans to raise corporate tax rates and this is coming in conjunction with
the tension around how a transition of power may or may not take place, not to mention
that global pandemic.
If investors are supposed to fear uncertainty surely they would be terrified of the current
world that we live in.
Logic would dictate that the best outcome for the major corporations that make up financial
markets would have been a nice simple and decisive Republican victory. At the end of
the day, they tend to be a slightly more pro-business party.
Instead what they got was an extremely contentious Democratic victory with the potential to bring
turbulence around key issues like covid relief packages in the coming month.
So what is going on here
Why have markets rallied so hard in spite of this turbulence
Will this market boom reverse if the proposed policies of the Bidens campaign are rolled
out.
And could it just be that investors no longer favored trump as president?
Now, this is becoming a common trend, but big disclaimer here, since this video will
be looking at the market rally in the context of the election, we need to note that we are
not politically advocating for one party or another. Everything over there in America
land looks all kinds of crazy and we do not want to get involved at all. We will be here
to comment on the economic fallout though.
Now this is actually the third time we have explored a similar market rally on the channel
before, but we will be looking at completely different contributing factors this time around.
Even still those other two videos are no less relevant, so if you are interested in this
topic go and check out those videos as well.
But in brief, some major contributing factors are a lot of money being pumped into the system
through quantitative easing from the federal reserve creating an environment where a lot
of people have a decent amount of cash.
This combined with record low interest rates means that people don’t have anywhere left
to keep their money other than the stock market where even if they can only get a 4-5% return
it’s better than the 0% they will get in a bank.
The other big reason we explored were foreign investors moving their money into the US market,
which has historically been perceived as a large stable safehouse during times of economic
turbulence in the world.
Now both of these factors are still true to a certain extent, but much less so now than
they were earlier in the year. Government stimulus has slowed down massively and was
ground to a halt prior to the election by the Senate being dismissed, this is the channel
through which the money printing done by the federal reserve gets out into the world.
What’s more, is that America is not the same safe house it once was for international
investors. The turbulence around the election, as well as swelling infection rates across
the nation, means that a lot of the institutions and individuals are instead preferring to
invest in their own countries which have comparatively faired a lot better.
The international community might also be able to pull some influence in a way that
people often forget. Their Variable Buying power
Since the start of the pandemic, the American dollar has dropped significantly compared
to other world reserve currencies like the euro, the yen and the Australian dollar.
This came following a huge spike the value of the USD during the initial crash.
When exchange rates are considered the S&P 500 is still comparatively below its all-time
high earlier in the year.
For example, I am an Australian that invests into American index funds using Australian
dollars, and my portfolio is still comparatively worse off than it was at the beginning of
the year. I know boo hoo for me.
But it also means as I earn a salary in Australian dollars I can buy more American shares with
the same amount of cash, driving up prices.
All of this is to say that these two factors tend to be what everybody points to explain
away the market rally, but if this really did explained everything, the new market rally
certainly would not have waited until now to spike up.
So What else is going on?
Earlier this week amidst all of the chaos in the world Pfizer announced they had developed
a vaccine with 90% effectiveness in initial trials.
This was great news and gave an indication to the world that this ordeal may soon be
coming to an end.
An end where life can go back to normal, where people go out, go to work, go to dinner or
go on holidays, all things that will breathe life back into businesses that have been hanging
on by a thread.
Now this is very good news obviously, and we don’t want to in any way diminish this
impressive achievement by pfizer and the wider medical research community, but the overwhelming
message from professionals in the know is not to get overly excited about this news
just yet.
Medicine is a legendarily bureaucratic business, any new product has to jump through an endless
array of hoops before it is released to the general public, especially when it is a vaccine
which has an even higher standard of testing because it gets given to healthy people, rather
than people who are already sick.
Now given the potential benefits, pfizer is in talks with the FDA to fast track this process,
cutting it down from something that would normally years, to something that could be
rolled out within a few months. But for this to be approved, there can be absolutely no
signs of any complications.
Even still Sometimes just the glimmer of hope is enough for investors to think that other
investors will get into the market and so they get into the market to try and beat out
those investors and so on and so forth until the type of reaction you would expect from
good news is achieved, even if the news wasn’t that great.
This is one of the key cognitive biases that is taught to most professional investors working
for large institutions.
The bandwagon Bias means people will look at the money they stand to make and jump in
safe in the comfort that there will be some greater fool following along.
As for genuine long term outlook, if this breakthrough is real and remains on schedule
for public distribution it would leed to a significant boost to the fundamentals of companies
that have been impacted by this health crisis.
Airlines could fly again, cruise ships could cruise again and shopping malls could go back
to being packed out warzones on a Sunday evening. You know like the good old days.
The thing is though these aren’t the stocks that have been driving this price boom. Retail
and transport have done well since the news broke, but they have been outperformed even
still by technology companies.
Now this is really weird because technology companies haven’t been too badly affected
by the new world that we are living in. In fact, some of them have benefited greatly
from online shopping, home deliveries, and business communications systems that have
become a requirement rather than a luxury.
So why would these businesses be doing better than the ones that really stand to gain from
this good news?
Well perhaps it is a sign, of a troubled
Road to recovery
There are alot of businesses out there which are now almost exclusively reliant on government
stimulus to remain alive. Mostly the businesses we were looking at earlier, like retail, airlines
and cruise lines.
Given the turbulence surrounding the election, it is likely that any talks of continued stimulus
are going to be pushed to the side in favor of arguing about the nuances of a broken election
system.
This means that these companies may very well fall into bankruptcy during this drawn out
process and even though the promise of a world back to normal may have only been a few months
away it’s no good when they are going into receivership now.
Tech stocks, by contrast, are doing well now, and will probably do better in a normal world
with higher employment, this makes them a safer bet for future prosperity.
Bill Ackman a hedge fund manager who profited over 2.6 billion dollars from a single trade
that predicted the first market downturn has announced earlier this week in an interview
with the financial times that he has taken out a similar position again to bridge the
credit gap of unstable businesses over the next 12 months.
There is no point betting on who the biggest recovery winner will be if you aren’t sure
who is going to make it to the recovery phase. But for those who do, there was one other
final piece of good news that came out last week.
A landscape of
Gridlocked stability
Investors love one thing above all else, and that is certainty.
Investors would rather know that the world is going to be hit by a giant asteroid for
certain, because then they could invest in bunkers and canned food companies, as opposed
to only having a 50% chance of being hit by an asteroid because if the predictions don’t
come true then those bunkers and canned food reserves are not going to perform well on
their portfolio.
We saw a slightly less extreme version of this effect earlier this year. When people
were unsure about how bad the fallout of the coronavirus could get they wanted to pull
their money out of the market until they could pick and choose where and when to put it back
in.
As soon as the world realized that oh yeah this is bad, people begrudgingly re-invested
just with the outlook of backing companies that would be able to weather the storm.
Now the future can never be 100% certain but when the outcomes of big changes in the world
are completely up in the air, most investors like to sit back and see how things play out
before funneling all of their money into something. Even if that means they might miss out on
some huge speculative gains.
Remember this is investing, not gambling although the line does sometimes get blurred.
Even still you might say well that kind of uncertainty still exists, and well yeah thats
true, but the election gave investors a much bigger gift than you might expect. A mixed
government.
Regardless of who is sitting in the oval office on the 21st of January (and again I am not
getting into it, you all be crazy) it doesn’t really matter because neither party will control
the house the senate and the presidency.
This means that any laws or budgets that want to get passed will either be rejected by one
step of this process or will need to be watered down to get the tick of approval from both
parties.
We went into a lot more detail as to how this works on this in our Trump vs Biden video,
so go and watch that if you are interested in bureaucratic government processes.
Now while this outcome might be less than ideal for the political parties its great
for investors. Bidens proposed tax plans will likely not make it through the Republican-controlled
senate without a lot of changes.
Likewise, any plans to cut welfare spending or lower taxes further will not get through
the democratic controlled house so if pushes government policy changes into a bit of a
stalemate. Which is fantastic for investors for a few reasons.
The companies they are investing in can work on the rules that exist in the world now and
don’t have to be ready to shift strategy due to some major change in policy.
It also means investors can project growth over a longer-term, rather than trading on
back and forth policy changes.
There is a semi-humorous expression in institutional investing, don’t change anything ever.
At economics explained we might call it stability and confidence. But whatever you brand it,
there is one way to make sure that nothing changes ever, and that’s to try and get
politicians to work together on something.
All jokes aside this may be a signal that investors may be getting.
The best of both worlds
Overall Donald Trump’s impacts on financial markets have been overwhelmingly positive,
driven heavily by the tax cuts and jobs act of 2017, markets have grown steadily over
his term as president, only really faltering twice.
Once was the christmas crash of 2018 which was a very short but severe downturn which
was eventually alleviated by strong consumer spending figures, and then the second was
of course the market’s reaction to the pandemic in early 2020.
Having a pro-business government has surprise surprise been good for business. But it hasn’t
been perfect. Trade tensions have been a major concern for
a lot of multinationals in recent years, businesses have been hesitant to fine-tune supply chains
especially involving china and Mexico out of fears that they will be hit with tariffs
and be forced to re-invest into alternatives.
While fiscal policy involves the co-operation of the legislative and executive branch of
government, the president has a lot more direct control over trade through the department
of commerce as well as just having face time with other world leaders.
One of Joe Biden’s big contributions to the Obama administration was shaping foreign
policy through trade, and throughout his campaign, he has maintained positive rhetoric about
building these mutually beneficial connections.
If businesses could be handed a future where they get to keep the tax cuts of 2017 while
having certainty about global supply chains and trade agreements, they would be very happy
little jellybeans indeed. And with the current mixed government, it looks like that might
be exactly what they get.
The idea that the markets are happy to see trump go is pretty silly, remember 4 years
ago his election drove a market rally for exactly the same reasons we have explored
many times on this channel, but as heartless as it sounds, it might be that his usefulness
has just run its course.
Big businesses have gone, tax cut’s you beauty we will take that, huge private sector
stimulus, don’t mind if we do, and now they are ready for the dessert which is healthy
international trade in a world that might soon be back to normal.
Final thoughts
The market can remain irrational longer than rational investors can remain solvent, and
who knows by the time this video is made public the market could have dropped ten percent
or shot up by ten percent it really is anybody’s guess at this point.
There are so many technical factors mixed with human emotions that go into pricing that
it really is hard to explain from time to time, but even still it is a great gauge on
peoples confidence in the world.
People often joke that the stock market is just a chart of rich peoples emotions, and
as funny as that may sound, it is absolutely true. So if there is a takeaway from this
new record high it’s that something is going on that makes wealthy people happy.
In the meantime average americans and citizens around the world can only hope that this is
something that will make them happy as well.
Now understanding what it is that makes these influential people tick can be a difficult
process, one that
can be made a
lot easier…
With trends