Market Overview – 12/10/2020

Last week was a strong one for equity markets, with the US rising by nearly 4%. There were good advances across most sectors and small company shares also performed well. Such a confluence of returns has been rare in this Covid-19 world where bad news on the virus has benefited the “stay at home” stocks while easing of lockdowns has favoured the “business as normal” companies. Last week was more about the greater likelihood of a US Democratic presidency and the prospect thereafter of a large economic stimulus package. A lot can happen in the next three weeks, however. Donald Trump has now declared that he is immune from the virus as he does cartwheels around the Oval Office and tweets fifty times an hour. There is still the possibility of a contested election which would delay any stimulus package well into next year. Notwithstanding that possibility, markets are taking the view that either candidate becoming president will result in more economic stimulus for the economy.

Somewhat unusually, this has the endorsement of the US Central Bank, the Federal Reserve. Normally, central bankers don’t comment much on fiscal spending, since it is not part of their remit. However, Chair Jay Powell has been actively recommending more government spending at a time when the Fed has arguably done as much as it can through financial policy. With borrowing costs low and the bank willing to “lend” money to the government without it having to issuing bonds in return, the potential spending levers are there. At the moment, a fresh stimulus package ahead of the election is looking increasingly remote, but at least there is agreement that the economy will need further support into 2021. Whose stamp is on the cheque remains to be seen.