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Foresight from the frontier.

November 11, 2020
  • After a messy US election, market find positives in expected Biden victory & Republican Senate
  • US labour market growth stronger than expected but flattening out, as COVID infections increase

The political – and legal – wrangling over the messiest US election since 2000 may not have subsided, but the markets appear to have coalesced around a consensus view of what happens next: Joe Biden will take his place in the White House on January 20th and, barring a shock result in January’s run-off elections in Georgia, will have a Republican-run Senate to contend with.

After weeks of anxiety in the lead up to the election, the outcome has already significantly reduced market volatility and fueled risk appetite. While some uncertainty remains, particularly as President Trump refuses to concede and pledges to fight the result in the courts, the political risk within the United States has greatly receded.

Looking ahead to the next four years, equity markets are already seeing positives in the result. The expected make-up of Congress, denying Biden and the Democrats control of the Senate, has put paid to the possibility of the new administration pursuing some of its more aggressive, anti-business policies, such as imposing higher corporate tax rates. A market-friendly infrastructure plan, on the other hand, where areas of bipartisan agreement exist, may yet pass.

Optimism is tempered, however, by the prospect of continued political deadlock over fiscal policy measures to support the US recovery and induce much-needed private consumption. Jay Powell’s pleadings for Washington to agree a stimulus package may continue to fall on deaf ears for months longer.

Overall, the prospect of a Biden presidency moderated by a Republican senate, coupled with strong Q3 earnings reports in the US, is a source of reassuring positivity for equity markets. History shows that the 12 months following an election are generally positive for equity markets, regardless of who is in charge. The truth is that global events, far more so than events in the US capital, will shape the market outlook in the months and years ahead.

The US labour market continues to recover, according to the latest figures published by the US Bureau of Labor Statistics. The economy added 638,000 new jobs in the month of October and unemployment dropped below 7% – a stronger performance than the market generally anticipated. Nevertheless, the picture isn’t entirely rosy. As the chart shows, the curve of labour market growth is flattening out. Covid-19 is back with a vengeance across the United States. As new lockdown measures are imposed, economic activity is slowing and so too is the pace of job creation. The risk of long-term unemployment, and the associated loss of skills and employability for US workers, remains a headache for policymakers and a potential drag on US growth prospects.

China’s V-shaped recovery in good shape, but stabilising

Make no mistake, China is continuing its strong recovery from the economic crisis earlier this year. But while the recovery is hardly petering out, it may no longer be continuing at the pace of recent months – October’s PMI index stabilised at 51.4 compared to 51.5 in September. Nevertheless, manufacturing continues to grow strongly, up to 53.6 in October from 53.0 the previous month, with shrinking inventories indicating strong activity and building up capacity for expected demand. With export numbers remaining strong too, China’s recovery stands in good shape.

Near-real-time indicators weaken in the US, as COVID infections rise

While a messy US election has dominated headlines, COVID infections have continued to rise. As people begin to restrict their movements or have restrictions imposed on them, near-real-time indicators – such as restaurant bookings, airline passenger numbers, hotel occupancy rates – are giving cause for concern, particularly for private consumption and retail sales in the short term. Yet the recent positive news around vaccines, which has buoyed markets, points to a brighter future in the medium-to-long term. Light at the end of the pandemic’s long tunnel can be expected to spur consumer spending and release pent-up demand.

  • 15 Nov: China’s industrial production has gathered pace for the past 6 months, topping 6.9% last month. October’s figures will give further indication of whether the Chinese recovery is stabilising.
  • 17 Nov: If near-real-time indicators are to be believed, US Retail Sales are expected to slip back in October’s figures.

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