Good afternoon,

 

I hope you are enjoying your weekend.

 

Global equity markets crept higher this week despite the lack of progress on a U.S. stimulus package. This week, I’ll address the dichotomy that has emerged on the virus front between the U.S. and much of the rest of the world. I’ll also discuss the implications of the upcoming U.S. elections now that Senator Kamala Harris has been announced as the running mate alongside Joe Biden on the Democratic ticket.

 

Coronavirus update:

Two meaningful trend changes began a few weeks ago, and have continued this week.

First, the U.S. has seen its number of new daily infections slow, particularly in states like Florida and Texas. Hospitalization admissions have followed suit and alleviated the pressure on the health care system. To be clear, the figure remains elevated, averaging more than 50,000 new cases daily. And there are states seeing increases. But, the national trend is heading in the right direction – lower - and suggests containment measures are working.

 

Implications of U.S. elections:

The U.S. elections are now just a few months away and the rhetoric will undoubtedly pick up sharply in the weeks to come. This week, Democratic presidential nominee Joe Biden announced that California Senator Kamala Harris will be his running mate. Vice President picks rarely influence election outcomes. While there may be some incremental impacts at the margin from this week’s news, I don’t expect it to shift the narrative much.

 

The race for the presidency understandably gets most of the attention. But, the legislative branches of the U.S. government will also be elected in November. The U.S. Congress is made up of the Senate (currently controlled by Republicans) and the House of Representatives (currently controlled by Democrats). Within Congress, there are certain rules that require enough bipartisan support for a law to be passed. This important division of power acts as a guardrail of sorts, and ensures that any sweeping policy changes have enough support from both Democrats and Republicans. In other words, there are checks and balances in the U.S. political system that ensure a President alone cannot drive policy.

With respect to election outcomes, I see three plausible scenarios: 1) status quo; 2) Joe Biden as President while the House and Senate stay unchanged; and 3) sweeping victory for the Democrats (President, Senate, and House). This latter scenario may pose the most uncertainty for the market as it could increase the odds of higher taxes and more restrictive regulation in the future among other things. Nevertheless, I think the elections are unlikely to alter the course of fiscal policy in the intermediate term as both Democrats and Republicans are incentivized to help their constituencies through this period of economic malaise. Furthermore, accommodative monetary policy, which has helped ignite the economic and market recovery is unlikely to change any time soon regardless of election results.

 

Market resilience:

Many investors remain concerned about the current backdrop. After all, we remain in the midst of a global pandemic, with an economy that is recovering after a multi-month period of forced shut down. Much uncertainty remains. Nevertheless, global markets have been resilient in recent months. The widely followed S&P 500, an index representing the U.S. equity market, is higher today than it was at the beginning of the year. Elsewhere, markets continue to claw back much of their losses, though they still remain below breakeven on the year. While this may seem incomprehensible, there are some justifiable reasons for the resilience. More specifically:

 

- We are learning how to keep an economy functioning with the virus lurking in the background.

 

- Containment measures, assuming they are followed – mask wearing and physical distancing – have proven to be an effective way of limiting the spread.

 

- Health care providers have learned how to better treat patients.

 

- Governments continue to buy time for more healing through substantial aid to businesses and consumers.

 

- Central banks have aggressively lowered interest rates, incentivizing borrowers to refinance or borrow for new spending or investment. Moreover, they have ensured the proper functioning of credit markets.

 

- The scientific community is closer today to finding a vaccine

 

- Economic momentum is improving, rather than deteriorating.

 

I have been impressed with the recovery.

 

Enjoy the rest of your weekend.

 

Tim