The Biden presidential victory, an anticipated split Congress along with the announcement from Pfizer and partner BioNTech that data from a vaccine they developed showed a 90% success rate in preventing coronavirus spurred the markets to new heights. Midweek, the market optimism cooled slightly and retraced part of last Monday’s gain but rallied Friday coming into the weekend, finishing off the week with positive performance. The TSX ended the week 2.5% higher but still in negative territory year to date at a -2.5%. The S&P500 added 2.2%, bringing the total year to 11%, MSCI EAFE jumped 4% for the week, took the year-to-date performance to a -1.7%, and the Russell 2000 leaped 6.07%, pushing year to date return to 4.53%.
News of the vaccine shifted investor sentiment, giving hope of a return to normal. Investor optimism propelled small-caps and value stocks, beating growth with tech stay-a-home stocks taking a breather. Travel and leisure stocks, along with energy stocks, rallied. Banks shares benefited from a sharp rise in the long end of the interest rate curve. The week’s optimistic tone continued with the initial jobless claims dropping to 709,000, a new pandemic low, and continuing claims fell to 6.8 million, further reducing the unemployment rate. The NFIB Small Business Survey before the US election remained steady for October after a slight increase in September. Whereas the University of Michigan’s preliminary sentiment for November decreased to a three-month low of 77 from an October 81.1 number, falling short of a Bloomberg survey of economists’ expected reading of 82.1
Coronavirus continued to dominate the news cycle in North America and Europe, with case counts on the rise as well as hospitalizations. In Europe, news of increasing cases prompted many countries, including the UK, France, Portugal, and Germany, to issue new lockdown restrictions or to extend partial lockdowns. The fear among some observers is a continuation of restrictive business policies arising from COVID that will tip the already-fragile economies of Germany and others into a recession or, at best, slow the tepid economic recovery. The US and Canada are also experiencing an increasing number of cases and hospitalizations, and restrictions and lockdowns are being discussed for targeted areas experiencing rapid increases in cases.
In the US, while the Presidential results are all but confirmed, Congress will not be settled until January 5 with the Georgia run-off elections for their two Senate seats. If the Democrats win both seats, then the blue sweep will be complete, and most expect renewed political market volatility. However, currently, markets forecast gridlock with the House going to the Democrats and the Senate to the Republicans. Last week’s market reaction to the divided Congress suggests a more muted response to tax increases but further delays in the fiscal relief package until as late as the end of January or later. The Democrats have a challenge with progressives wanting to have a more significant impact on fiscal and social issues. The move to a more socialistic government has many at the center of the Democratic party fearful of the mid-term elections. On the other hand, there are many on the Republican side of the aisle who endured the political bashing of the last four years and have no interest in compromising. For anything constructive to be accomplished, both parties’ center must come together; neither party can do it alone if the Congress remains split.
Several agendas converged from an investment perspective, creating the most uncertain investing environment seen in several lifetimes. Climate change, the globalist wishes to re-balance, re-image, and re-start capitalism, debt levels, historic low-interest rates, social unrest, and global leadership operating in crisis mode are a recipe for difficult times ahead.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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