What the US election result means for investors
When Joe Biden emerged as the 46th US president, democratic nations including Germany, Japan and the UK are reported to have breathed a collective sigh of relief. Political leanings aside, what does Biden’s win mean for investors, and how might it affect a rotation out of growth and into value or cyclical stocks?
It is unsurprising to most of us here in Australia that a thoroughly divided nation produced such a close outcome in the US elections. We have seen the same lack of faith and trust in Australia’s major political parties also producing hung parliaments here. The split Congress, as well as the division between Congress and the White House, indicates that Americans do not want to offer any party a mandate for full control. Consequently investors can expect legislative gridlock. Few, if any, major policy initiatives are likely to be implemented. It is unlikely Biden will be able to raise taxes on high income earners or corporations, nor will he be able to progress major investment in green energy.
More immediately, it is also possible that fiscal stimulus measures – which the market was desperate to see before the election – will be mired in controversy and stonewalling. A divided Congress has also seen long bond yields fall sharply with investors now disregarding the previously expected fiscal investment boom.
The close election results have the US sitting President claiming electoral fraud and threatening legal challenges. While we put low stock in the success of these legal challenges, we do not however discount the possibility of civil unrest. And many pundits suggest Trump may veto legislation such that Biden is handed a poisoned economic chalice on January 20, when the President Elect takes the helm of democracy’s most powerful and influential nation.
The market’s buoyancy late last week suggests any social unrest will be short-lived. Remember however that the election results reflect a nation with deep divisions. This will take time, and perhaps several political cycles, to heal.
Value v growth stocks
Last week’s rally in stocks reflects the following:
- A divided government has de-risked some of the concerns about higher taxes, lower profits and the anti-trust narrative against big tech,
- The absence of previously anticipated social upheaval and constitutional crisis, and
- Falling bond yields have fed leadership of growth and mega-cap stocks in last week’s rally.
The above three observations along with a reversal of the pre-election steepening of the yield curve, suggests a potential delay to any rotation into value or cyclical stocks.
The bubble we have previously described in the technology and growth sectors could be revived as expectations of bond yields staying lower for longer are entrenched.
All bubbles however eventually burst.
Without doubt attention will now return to the pandemic and its impact on various countries. As France, Ireland, Germany and the UK return to various levels of lockdown, the COVID-19 pandemic cannot be relegated to the chronicles of history just yet.
While some countries are said to be approaching herd immunity, there is much conjecture about whether such a result is even possible. In the meantime, hope remains that a vaccine will be developed and successfully distributed. Failure on this front and a lack of herd immunity could rattle markets again. For the moment, however, hopes of a vaccine and supportive fiscal and monetary settings deliver something of a Goldilocks scenario for markets.What does Biden’s win mean for investors, and how might it affect a rotation out of growth and into value or cyclical stocks? I take a closer look. Click To Tweet