Market Update – 14th October 2020.

Although this week’s US Presidential debate between Donald Trump and Joe Biden has been cancelled, it hasn’t stopped the ongoing stimulus shenanigans and rapidly approaching election from continuing to be a large influence on global equity markets.

As Joe Biden (a Democrat) continues to widen his lead in the opinion polls, the chances of a contested and drawn-out election result have reduced significantly, which in turn, has positively helped equity market sentiment.

Unfortunately, we believe there is a downside to this confidence:  while there is a good chance that an election win by Joe Biden will result in an even bigger fiscal stimulus package than the one that was being negotiated, it is unlikely to be implemented until well after his inauguration on Wednesday 20 January 2021.

‘Politicians fiddle while the economy burns’ springs to mind, as we believe that the US economy needs a new fiscal stimulus package sooner rather than later in order to help those households and businesses that have been hard-hit by the coronavirus outbreak and associated lockdowns – as waiting until the New Year will mean the rapid ‘V-shaped’ rebound that we are currently seeing in the US economy (the world’s largest economy) will moderate to a ‘Nike Swoosh’ shape.

Interestingly, two big US banks (JPMorgan and Citigroup) yesterday (13 October 2020) reported Q3 profits that were much better than major analysts had expected, thanks to lower bad debt provisions.  As we said in our market updates on 15 April 2020 and 15 July 2020 (please see here and here), when the US banks set aside massive bad debt provisions earlier in the year, we thought they were potentially ‘kitchen sinking’ (meaning those earlier provisions could be future profits if those bad-debt losses don’t fully materialise – and so far most Americans are continuing to make their credit card and loan repayments).

Brexit is the other key theme impacting equity markets this week.  While it may feel like déjà vu, given all the political bluster from both the UK and EU as we approach yet another Brexit deadline, it is important that the two sides come to a trade agreement, even if it is fudged, given the challenges ahead for both the UK and European economies thanks to the coronavirus outbreak.

The challenges facing the UK were clearly visible in yesterday’s employment data, which showed employment fell by 153,000 – five times the 30,000 expected by the major economists (we assume they must have missed all those companies that have announced redundancies over the past couple of months).  As a result the unemployment rate rose to 4.5% – while this is still low by historical levels, it is the highest reading since April 2017.

Given the new tighter localised coronavirus restrictions being put in place, coupled with the ending of the government’s Job Retention (furlough) scheme at the end of this month, unemployment is likely to rise sharply.  In fact, sadly, we wouldn’t be surprised to see the unemployment rate at 7% or 8% in the coming months – hence our view that it is only a matter of time before the BoE provides further monetary stimulus and cuts interest rates to below zero.

Investment Management