The Multi-Asset Process

October 2020 Market Review

Covid-19 word bingo brought us another fresh term in October, with so-called firebreaks dominating headlines. Amid this linguistic mangling as the government attempts to workshop an increasingly exhausted UK, the situation remains shrouded in uncertainty.

Concerns about rising Covid cases enforcing nationwide lockdowns weighed on markets, with many falling back to April levels by month end – and these fears proved accurate at the start of November, with a new four-week shutdown announced in the UK. Chancellor Rishi Sunak had initially set out another multi-billion package involving monthly grants of up to £2,100 to companies in Tier 2 regions not forced to close but struggling to be commercially viable. But with another government U-turn on full lockdown and the tier system superseded for now, the broader furlough scheme has been extended.

Elsewhere, the seemingly never-ending dance of Brexit continues, with another month of walkouts, last-minute reprieves and ‘doors still ajar’. Negotiating teams have now started daily sessions as both sides push to finalise a deal by mid-November. Four years on from the vote, I increasingly agree with our UK manager at Liontrust Anthony Cross, who said in a recent interview that once the politicians move out of the way, businesses will take the reins and do whatever they can to make sure Brexit works.

In Europe, worries about a GDP double-dip after a short respite led European Central Bank head Christine Lagarde to hint at further support in December, although she left the bond-buying programme unchanged for now. Lagarde said the bloc’s economy is ‘losing momentum faster than expected’ amid a second wave of Covid cases and the ECB will recalibrate its instruments, as appropriate, to respond to the unfolding situation as it looks to support both economic recovery and inflation.

In contrast, the US is struggling to agree further fiscal aid, with lawmakers failing to pass a package before the election. Weaker markets towards the end of the month were lifted after data showed the economy grew at record pace in Q3 but this was largely down to trillions of relief dollars pouring in and there are major concerns for the months ahead. House of Representatives speaker Nancy Pelosi signalled optimism on a deal with the current administration but opposition remains in the Republican-controlled Senate. While differences between the two parties have diminished, “the more it narrows, the more conditions come up on the other side,” according to White House economic adviser Larry Kudlow, a description that works just as well for Brexit.

Obviously, the US election is at hand and we should hopefully have some resolution of this situation, as well as the bailout package, in November, even though a morass of controversy and recounts is expected. A huge number of Americans 80 million, twice the number from 2016 are set to vote by mail given Coronavirus concerns, meaning any result may be considerably later than we have seen in recent years.

Since the Second World War, a higher stock market going into the US election has largely signalled the incumbent president or his party would emerge victorious. But while the S&P 500 is up, albeit only just, since the end of July, market watchers suggest this could be the third occasion where a positive equity backdrop sees a reversal in the White House. The S&P’s predictive power is usually supported by a so-called ‘election portfolio’ of stocks expected to do well in the event of the incumbent party staying in office. This time, however, companies that would likely thrive under a Joe Biden presidency, such as clean energy, have outperformed traditional Trumpean areas such as metals, mining and infrastructure, and many believe the market is already discounting the latter losing power.

Looking back through history shows geopolitical disruption has been the key factor when markets failed to predict election victory in 1968 and 1980, and Covid-19 is obviously turning the world on its head today. On the first, the country was torn apart by Vietnam and the assassinations of presidential candidate Robert Kennedy and Martin Luther King. In such an atmosphere, the S&P was up close to 6% in that July to November period but Americans turned their backs on Vice President Hubert Humphrey to elect Republican Richard Nixon. In 1980, meanwhile, Democrat Jimmy Carter failed to win re-election and many put this failure down to the year-long hostage situation in the US Embassy in Tehran, which ended when Ronald Reagan was inaugurated.

Highlighting why Trump has been keen to throw the proverbial kitchen sink at the stuttering economy in recent months, the history books also show us that when a recession has occurred in the two years before an election, the incumbent has tended to lose. Again, the economy has predicted the winner of every race since Calvin Coolidge a century ago, who was victorious despite the country being in that recessionary window. Coolidge inherited a downturn when President Warren Harding died in 1923 but by the time Americans voted in November 1924, the Roaring 20s were under way and the economy strong again.

While interesting to look back in history, however, it seems fair to suggest two huge caveats, in the shape of Covid-19 and the large-cap tech effect on equities, have rendered traditional market or macro prognosticating null and void. Conventional wisdom also suggests a Democrat win would be negative for markets due to higher taxes, more regulation and higher spending but, as we all know, the current environment is anything but conventional. The stimulus of up to $3 trillion wanted by Democrats in January 2021 would be expected to boost markets beyond the current narrow tech-heavy leadership and a Biden-led administration would also see trade tensions with China cool down and generally create a more stable, less late-night twitter-driven news agenda.

With all this uncertainty continuing to hold sway, we remain in the same wait and see mode on our portfolios, unwilling to add more cash into equities or take it out given the potential for interest rates to dip into negative territory and bonds also offering fairly muted returns. For the most part, we see equity markets as up with events, apart from that tech-led dislocation in the US that we have discussed in previous commentaries. We continue to believe it takes a major leap of faith to buy into these stocks at current prices, trading on multiples built on several years of future earnings.

To be clear, given the current path of many tech companies, it is hard to argue against them achieving these earnings, particularly if they cut back on research and development – but the key thing to understand is that a huge amount can happen in three or five years, particularly in the face of Covid-19. That means investors are basically blind buying these stocks and if we do see market leadership begin to shift to a broader base, there could be further selloffs of the kind seen in September.

For a comprehensive list of common financial words and terms, see our glossary here.


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Please remember that past performance is not a guide to future performance and the value of an investment and any income generated from them can fall as well as rise and is not guaranteed, therefore you may not get back the amount originally invested and potentially risk total loss of capital.

This content should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy.  It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust.

Tuesday, November 3, 2020, 9:50 AM