In this piece we try to outline the equity market reaction to the US election, why it is relevant to us and the 5 points as to why we believe that buying long duration assets is not the right answer.
Ahead of the US elections
It is never easy at the best of times to predict the outcome of political elections. Most of the recent elections are proof of that. Would pollsters be right this time? Would Trump pull another rabbit out of the hat? Might it be a close contest? – likely resulting in lengthy legal battles. Would there be a ‘Blue Wave’? As such, markets approached this election cautiously, selling off into the event. All of this at a time when markets were already at all-time highs, dominated by a small number of US stocks.
The US election result
As markets opened on Wednesday morning, an outright Trump win seemed inevitable and certainly any thoughts of ‘Blue Wave’ were dead in the water. More government intervention and regulation, more profligate spending and higher taxes could be ruled out.
Whilst sad for liberals, this wasn’t a bad outcome for the markets: 4 more years of Trump, a known, with the inevitability of a new fiscal package and a much-reduced probability of tax hikes was a satisfactory outcome – markets liked it and rallied. Then as time moved on, the likelihood of Trump winning reduced, as postal ballots – heavily skewed in Biden’s favour – were counted. However, without the ‘Wave’, specifically a Democrat Senate, the ability for a huge reform agenda with tax reform and fiscal largesse seemed a low risk…and so the market continued to re-risk; markets went up ‘bigly’.
Market moves are only part of the story, however. What the market bought was arguably more important. The skew on Wednesday and for part of Thursday’s trading sessions (European markets) was ‘Quality’ and ‘Momentum’ names at the expense of ‘Value’ or short duration. A Biden clean sweep, as mentioned, meant fiscal spending because there was a will (policy) and a way (the Senate). Without a clean sweep the risk is a ‘lame duck’ presidency, meaning Biden struggles to pass incremental legislation let alone reform. Under these circumstances any new fiscal packages are likely to be small and certainly do not reflect a regime shift, i.e. the Fed, with monetary policy, remains the only game in town. Result: yields fall, buy ‘Growth’, buy duration and sell ‘Value’.
Read our in-depth assessment.