The outcome of the US election, with Democrat Joe Biden named as president-elect, and the likelihood of a divided Congress (assuming the Republicans win the battle for the Senate), has widely been perceived as good news for financial markets. Biden’s victory appears to signal a move back towards a more globalised US, but a Republican Senate would limit his administration’s ability to implement potentially onerous business regulation and revisit the Trump administration’s tax cuts. At the same time, as the two parties have indicated a willingness to work together to support the economy, there is the prospect of progress on the fiscal-aid front, but the untethered fiscal deficits and government spending that might have come about under a Democratic ‘clean sweep’ scenario now appear unlikely.
Enter the vaccine
While markets were still digesting the election fallout on 9 November, it was announced that a Covid-19 vaccine being developed by Pfizer and BioNTech has been found to be more than 90% effective, and could be available for use by the end of the year, subject to regulatory approval. This potentially game-changing development has provided a boost to more economically sensitive areas – such as hospitality and travel-related businesses – which have suffered the most under coronavirus restrictions.
The market dynamic is a repeat of the action seen in late spring when economies began to reopen, albeit on that occasion cut short by an acceleration of the virus in the US south. This time, the vaccine news makes it likely that a recovery can be stronger and more durable. Clearly the northern hemisphere winter will still be difficult as a vaccine is unlikely to be distributed in time to see a rolling back of restrictions in Europe and an avoidance of further restrictions in the US. Nevertheless, with a vaccine on the horizon, markets appear likely to look beyond the near term.
Implications for monetary and fiscal policy
One potential conclusion to draw from the vaccine development is that less monetary and fiscal support may now be required. Monetary and fiscal policy have been used to offset lost incomes for the private sector, and a broader recovery in this area will reduce the need for monetary and fiscal support.
However, there are still many unknowns around the timing of a potential vaccine. While equity investors will probably continue looking ahead to the possible earnings implications of a broader lifting of restrictions, monetary and fiscal policy is likely to remain in place while economies continue to recover. The US Federal Reserve (Fed) has recently made it clear that it is ready to increase the size and duration of its monetary stimulus programme in an anticipated economic slowdown, should Covid-19 restrictions be ramped up and fiscal stimulus be further delayed. With market expectations of inflation well below the Fed’s inflation target, it appears unlikely that the central bank is ready to change direction at this juncture.
Case for a melt-up?
With large-scale monetary accommodation remaining in place, rising hopes for a Covid-19 vaccine, and a US election outcome that appears relatively benign for investors, there appears to be a strong likelihood that the upward trend in markets will continue, with the very real possibility of a ‘melt-up’ into the end of the year and beyond. While Covid-19 continues to cloud the outlook, its impact should continue to decline, and investors can begin to look forward to some economic normalisation. But with the pandemic likely to have catalysed lasting changes to the fabric of economies, we believe charity investors will benefit from employing an active and disciplined approach in seeking to identify the risks and potential rewards that lie ahead.
Brendan Mulhern is global strategist, and Rob Stewart is head of charity investment at Newton Investment Management
These opinions should not be construed as investment or other advice and are subject to change. This material is for information purposes only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell investments in those securities, countries or sectors. Issued in the UK by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Registered in England No. 01371973. Newton Investment Management is authorised and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation.