What effect will the US election have on markets?

Seema Shah, Chief Strategist at Principal Global Investors looks at the 2020 Presidential election and asks what effect, if any, it will have on markets

The most contentious Presidential election in US history?

“Polls continue to signal a decisive victory for Joe Biden, with some models predicting a double-digit percentage Biden popular vote more than twice as likely as President Trump being re-elected. This is good news for investors, not because markets like one candidate better than the other, but because markets hate uncertainty and when polls narrow, there is less confidence in the eventual election result.

“Analysis suggests there is no statistically significant correlation between the political party in office and equity market performance – elections don’t stop prevailing economic conditions from driving markets. At the same time, the outcome of the Congressional elections, in particular the Senate will arguably matter more than who sits in the Oval office because policy changes do have lasting impacts on the economy.”

Don’t let political beliefs cloud long-term investment plans

“We know from experience that polls do not have a perfect predictive track record, but neither do market expectations. The overwhelming belief in 2016 was that a Trump victory would be negative for risk assets, yet until the pandemic Trump had presided over one of the best market performances in decades.

“Investors should remember that the fireworks and noise surrounding the election will subside, and markets will reassert a trajectory determined by fundamentals rather than election news flow.”

“In our view, reducing long-term investment allocations because of a political view means taking a stance against the ability of the US economy to grow, and believe that an active, long-term approach remains best, even for investors worried about the election.”

What effect will the policy leanings and decisions of the new President have on markets?

“Being tough on China remains one area of bipartisan support – and a key policy focus point for both sides. Trump would inevitably remain tough on China. A Biden administration, on the other hand, might return to a more predictable foreign policy stance - but would likely take a hard stance nonetheless. It is therefore likely that the relationship between the two super powers will remain confrontational. The full market impact of this tension is difficult to quantify.

“Big Tech has been a focal point for the US Government for some time, resulting in multiple federal, state and congressional antitrust investigations which have been ramped up in recent weeks. We expect the assault on Big Tech to continue regardless of who wins, but at the same time believe that action in the form of legislation is likely to be a process measured in years rather than months.

“Markets have become increasingly preoccupied by the outlook for additional fiscal stimulus – an area where the two candidates differ significantly. A Democratic sweep would likely result in a positive fiscal stimulus package in coming years, whereas a second Trump administration would not see major changes in tax or spending policies, in other words, reduced fiscal stimulus.”

Implications for investors

“A widening of the gap between the two candidates is positive for markets because it means a prolonged spell of political uncertainty is less likely. At the same time, pre-election polls are by no means perfect predictors of outcome so adjusting portfolio allocations to position for the candidate most likely to win is a dangerous strategy.

“Regardless of the outcome of the election, markets will remain buoyed by easy financial conditions, accommodative monetary policy and ample liquidity, factors which have already driven them to record highs despite the disastrous effects of the pandemic.

“Ultimately, investors should remain focused on fundamentals and fully invested during the election. The priority should be diversification and active positioning for a slow and protracted economic recovery backed by central bank liquidity.”

Microsoft beats expectations

eToro's Simon Peters gives an update on the broader markets.

Microsoft’s earnings report led headlines, as an expectation beating calendar Q3 (the firm’s fiscal Q1) played off against weaker than anticipated guidance for the current quarter (its fiscal Q2). Highlights included the firm’s cloud-computing business Azure, which increased revenues by 48% year-over-year. In the current quarter, the release of the firm’s new generation of Xbox consoles will be crucial, and the company doubled-down on gaming last month with the announcement that it is acquiring ZeniMax Media — which owns game developer Bethesda — for $7.5BN.

In other headlines, chipmaker AMD finalised a previously-rumoured deal to acquire rival Xilinx for $35bn, following rival Nvidia’s $40bn move for Arm Holdings. The firm is funding the deal entirely with stock, taking advantage of a 100% plus run-up in its share price over the past 12 months. Xilinx stock popped 8.6% after the news, leading the S&P 500.

What to watch

Payment giants: Rivals Visa and Mastercard both deliver their third-quarter earnings reports on Wednesday, with the latter marginally ahead in the share price stakes in 2020 so far. Both firms are dependent on payments volume, to which a recession poses a threat, and the companies’ results will provide a window into the health of consumer confidence and spending volumes. Currently, 26 out of 36 analysts rate Mastercard stock as a buy, while 27 out of 36 analysts rate Visa stock as a buy.

UPS: Delivery giant UPS has been a beneficiary of the Covid-19 pandemic, as online orders have surged and led to a huge volume of packages. Year-to-date, the firm’s share price is up by more than 45%, taking its market cap to $145BN. The company’s outlook for the holiday season will be key to watch when it delivers its Q3 earnings report today, including plans to handle the logistics of hiring tens of thousands of seasonal staff during the pandemic. Wall Street analyst expectations for the company’s Q3 earnings per share figure have improved over the past three months, from $1.41 to $1.90.

Boeing: Airline manufacturer Boeing has been under enormous pressure in 2020. The firm came into the year with a scandal on its hands following fatal accidents involving its 737 Max aircraft, which was then grounded worldwide. After that, the decimation of air travel demand due to the pandemic set the company back further. Boeing’s share is down 52% year-to-date as a result. Today the company delivers its latest quarterly earnings update, with the speed at which it is burning through cash and the state of its order book and production rates key points of focus.

More than 60 firms in the US with market caps greater than $10BN report quarterly earnings on Thursday, including Amgen, Gilead, Ebay, Ford Motor Company, Pinterest and Teledoc. In the UK, Royal Dutch Shell delivers its Q3 earnings on Thursday.

Crypto corner: JPM Coin goes live as investment banking firm goes all in on crypto

Major asset management firm JP Morgan has announced its very own cryptoasset, JPM Coin, is now live, while also announcing the creation of a new crypto business unit called Onyx.

CNBC reported on Tuesday that Takis Georgakopoulos, JPMorgan global head of wholesale payments had announced a ‘major tech firm’ would begin using JP Morgan’s technology to make wholesale global payments this week. JPM Coin is run on an in-house blockchain called Quorum, which is based on ethereum blockchain technology.

The bank reportedly sees blockchain technology as now commercially viable, and as such has created a 100-person-strong crypto business unit called Onyx to handle cryptoasset projects.

Christine Moy, blockchain lead at the asset manager later said on Twitter the firm was focusing its efforts on the wholesale payments business looking to remove inefficiencies that could save the banking industry hundreds of billions of dollars a year.

Sell-off in Europe

Joshua Mahony, Senior Market Analyst at IG said, “Expectations of a fresh bout of restrictions in France and Germany have sparked yet another selloff in Europe, with the DAX entering correction territory once again.

“Mainland European markets are once again at the forefront of a collapse in equity valuations, with a second bout of nationwide lockdowns raising the chance of a double-dip recession.

“While regional action helped alleviate much of the negative market impact in recent months, the sharp ascent in Covid cases throughout Europe clearly calls for more dramatic measures.

“With the DAX slumping into a fresh four-month low, we look to be on our way to finally see the second major collapse in equity prices since the March bottom.

“With expectations that France and Germany seemingly on the cusp of announcing more draconian measures today, we are unsurprisingly seeing pressure on travel stocks in anticipation of further cancellations.

“However, Rolls-Royce leads the declines by some way, with the manufacturer trading 64% lower after announcing a £2 billion rights issue and fresh business unit closures.

“At a time where the company is already struggling to cope with the fallout from the first set of lockdowns, the almost inevitable period of secondary lockdowns in Europe does little to bolster confidence for Rolls-Royce.

“With the current market cap down to £1.54 billion, it is understandable for investors to question the value of a company that could easily end up pushing for yet another multi-billion rights issue down the line.”

Tickers

FTSE 100 - 2.55%

Nasdaq - 3.73%

S&P 500 - 3.53%

All data, figures & charts are valid as of 29/10/2020. All trading carries risk. Only risk capital you can afford to lose