Market Overview – 10/11/2020

It is all over bar the shouting, although it looks like the shouting will carry on for some time yet, as outgoing President Donald Trump refuses to accept that Joe Biden won fair and square. So endeth the election of the 46th President of the United States. Financial markets were wrong-footed on the outcome of this, starting last week they were convinced of a “blue wave” clean sweep for the Democrats. In anticipation of a large fiscal stimulus package, bond yields rose, and cyclical sectors replaced technology as the share price leaders. When the election results started to come in and it became clear that the outcome would be a lot tighter, these earlier moves went into reverse.

Overall, however, equity markets had their best week since April, with US shares rising by 6%. The prospect of a split Congress implies that there will be a smaller stimulus package than previously expected, but there will be a greener agenda. President-elect Biden has said that one of his first actions will be for the US to rejoin the Paris Agreement on climate change. Previously announced tax rises are less likely to happen with a Republican dominated Senate.  Meanwhile tighter regulation of technology and pharmaceutical companies may be more difficult to implement. A gridlocked Congress is not necessarily bad for markets. In fact, the VIX, the equity market’s measure of volatility, fell sharply last week, suggesting that a period of relative calm is preferable to the anxiety and chaos that often seemed part of the previous administration.

Until we see the shape of the new government, it is difficult to predict the details of future policy. However, the markets will be looking to see how the US deals with the rest of the world, particularly its relations with China. Joe Biden is determined to rebuild bridges both internally and externally. Time will tell whether he can succeed.