By Sam Evans, Co-Founder & CEO
Finally, we have a winner. After a roller-coaster week with the highest electoral turnout since 1968, Joe Biden was finally declared 46th president of the United States of America this weekend. With a big sigh of relief, we can now move on to a new era of leadership and policy. That being said, the world is still locked in the grip of uncertainty. The pandemic continues its march. The economy sits on a knife-edge. Millions around the world are facing the prospect of unemployment and job uncertainty going into the New Year. With Joe Biden taking over the helm in Jan 2021, what can we expect from the markets ahead?
Of course, we must expect a different economic approach from a Biden administration. Yet how drastic could these changes be and does the Biden administration want to shake things up too drastically? Even with the global impact of COVID-19 still leaving its mark, US Equity markets have still pushed on throughout and made new record highs. Today at the time of writing, we saw 30000 printed on the Dow Jones Futures. This was boosted by Pfizer announcing success in the testing of their coronavirus vaccine, at a rate of more than 90% effectiveness. The coming days will likely see more upside as this news is digested worldwide. However, we still likely have a long way to go before full distribution on a global scale. Remember though, any good news on COVID is likely to see upside for the markets.
Does it matter who would have won the election?
This brings us to an interesting discussion. Without a doubt, COVID-19 will be dominating the news headlines for the foreseeable future. Therefore, does it really matter who is sitting in the presidential seat? If Trump would have won the election, the news from Pfizer would still have been the same. I very much doubt we would have seen a different reaction in the marketplace to the vaccine news. The problems the pandemic has caused, go way beyond any presidential administration. Now of course there are different ways to deal with the economy and the issues the virus created. However, the current economic landscape we find ourselves in is not a result of economic policy. No matter who is in power, the repercussions will still need to be dealt with.
It could be argued that most investors had already factored in a Biden win before the official result. The polls were pointing in that direction well ahead of time. The market likely also factored in a Republican Senate as well. This is looking like the most likely outcome. The stock markets generally carried on rallying as normal considering this. We should also remember that the Federal Reserve has made major commitments to provide stimulus to our economy throughout the COVID pandemic. While any presidential administration can put pressure on the Fed to change its policy, its nature as a private bank will allow the Fed the autonomy it needs to continue this direction.
We now live in a world built on low interest rates. The Fed believes that keeping the cost of borrowing low is a methodology we must maintain to stimulate economic growth. From a purely macro-picture view, no administration is going to attempt to heavily challenge this. Nor for that matter would want to. The effects of suddenly raising interest rates would no doubt cripple economies worldwide and we are stuck in this cycle of low-cost borrowing for the foreseeable future. For now, we can expect bond yields to remain low, as the Fed continually seeks to buy national debt and support the economy. In turn, this bodes well for the stock markets, keeping credit readily available to corporate entities and making the stocks the most attractive for investors to seeking higher returns. On the surface and for now, it looks like business is normal.
When it comes to the energy markets, Biden has expressed interest in enforcing more restrictions in the energy market. It has been suggested that he intends to ban new oil and natural gas excavation permits on federal lands. The natural result of this policy would likely reduce oil supplies on a domestic level. This would lead to higher prices in oil as imports go on the rise. However, global demand for oil will need to be factored in to see a rise in oil prices. If we do see a slowdown in the global economy as the wider effects of the pandemic become more apparent, we are likely to see oil stay in a rangebound formation for the foreseeable future.
Interpreting the market by behavior
For me, the easiest way to interpret the market is by its behavior. It can tell you a lot if you are willing to listen. Personally, I have always respected the fundamentals but make my decision to enter and exit any investment on price. If we look at the SPY chart below, there is no real concern about the sustainability of these prices while key levels are holding, namely around the $300 area:
I find it difficult to fight this upwards trend in the markets until I see real weakness enter the fray. As I have mentioned in my previous articles, there are too many gurus out there trying to call the top of the stock market. And across the board their experience is the same: the market keeps pushing higher. Those who have been willing to buy the dips have prospered. Though they have forced to pay higher prices and see a decrease in their rate of return.
While it will also be a challenge to keep making new highs, we cannot expect any major sell offs until the wider effects of COVID-19 have played out. Major defaults on a corporate or banking level would likely be the primary catalyst needed for any major market downplays in 2021. I genuinely believe this uptrend is unsustainable and yes, I do see a major correction coming. That correction is likely to be greater than anything we saw in 2008. However, do not rush to be the person predicting it. The market will show you its hand if you can be patient and wait for the signs. So far, there are simply no signs.
It doesn’t matter who holds presidential power. The markets will do what they are going to do regardless. We must remember that most economic factors are already factored in by the smart money and the institutions. My advice is simple: build a solid investing plan, embrace risk management, and pick your targets wisely. Sound investing requires objectivity and common sense over anything else. The news and economic landscape will always change. The way you make and lose money, will likely always stay the same.
Take care and be well,