The long-awaited US election took place last week with the predicted result of a Biden win. The market responded with the largest weekly rally since April, which started on Friday of the previous week when it looked like the Congress would remain split, and gridlock would limit Democrat tax increases. The TSX gained 4.5% (YTD -4.5%), S&P500 rallied 7.3% (YTD 8.6%), EAFE advanced 7.6% (YTD -5.9%), Nasdaq jumped 9.01% (YTD 32.57%) and the broader-based Russell 2000 bounced 7.27% (YTD -1.46). Early in the week, value stock showed some life, but momentum and growth stocks once again took over leadership by the end of the week.
According to FactSet, 89% of the S&P 500 companies reported earnings results by the end of the week. Eighty-six percent reported positive earnings surprises, and 79% of the reported companies reported positive revenue surprises. For Q4, 19 S&P companies reported negative guidance compared to 41 issuing positive guidance.1 See the full report here.
The Federal Reserve meeting came and went with little fanfare overshadowed by the election results. The policymakers met on Wednesday and Thursday and released a statement observing the coronavirus continuing to present a headwind to economic growth. After the meeting, Chairman Powell said that the central bank still has monetary tools to boost the economy should it become necessary. He suggested the Fed could expand purchases of Treasuries.
The Canadian unemployment declined to 8.9%, with 83,600 new jobs added in October. The latest jobs data for October suggests a slowing from previous months but still positive as general economic conditions struggle with re-instated lockdowns returning in areas most impacted by new COVID cases. In the US, 638,000 jobs were added in October, beating expectations. The unemployment rate dropped to 6.9% from 7.9% in September. There is some trepidation surrounding some states and municipalities considering new restrictions on consumer businesses with the election over. New restrictions would stall the employment recovery and would add more stress to the system. A congressional stimulus package could relieve some of the pressure.
With the election now behind us, what is the outlook for markets? Unfortunately, as they say, it is complicated. If the Democrats control the Senate, the outlook for equities would indeed be unfavorable if they follow through with campaign promises of higher corporate, capital gains, and income taxes creating a significant headwind for economic growth or even recovery. The consumers contribute around 70% of the US GDP (in Canada, it is about 60%). Taking money out of consumers’ pockets generally results in the slowing of the velocity of money and economic activity. If the Senate remains in Republican hands, they could prevent the previous administration reforms’ unwinding, which resulted in economic stimulation. One of the campaign promises was to stop the virus at all costs. If the US follows the European example and re-instates businesses’ restrictions, the market response is likely to be negative.
The world has presented an opportunity with COVID to rebalance, reimage, and reset economies to the new green world. As more governments sign on to the idea, the transition will not be smooth as dislocations will increase poverty, starvation, and civil unrest. The World Bank predicts that the number of people living in extreme poverty will rise by anywhere from 70 million to 100 million this year and may stay that way for several years as the coronavirus-related slowdown in economic growth is expected to linger.2 As Oxfam reported this summer, increasing starvation resulting from disruptions in food production and supplies due to COVID could result in more deaths than COVID. We are seeing increasing civil unrest and protesting around the world. As we have anticipated, Canada and now potentially the US joining with their European colleagues means portfolios will need to be adjusted to protect against the coming fallout.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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