Greetings!
Once every four years, Americans go to the polls to choose the country’s leaders, including the President and members of Congress. Politics have grown so divisive that the topic has become nearly taboo in polite social settings, but even the most strident partisans can agree that Republicans and Democrats have different visions of the future.
We sought to summarize the major issues in the upcoming election from the perspective of how each party would ideally prefer to address them. Remember, these perspectives don’t need to align with your personal politics, but understanding them can help you consider their potential implications for your financial life & 2020 elections
Q4 Update -The Old new cycle
by Russell Investments - Andrew Pease
While overheated tech stocks and U.S. election uncertainty present near-term headwinds, we believe positive vaccine developments, dovish central banks and an ongoing economic recovery should allow equity markets to push higher.
Key market themes
The global market is in the early recovery phase of the business cycle following the COVID-19 recession. This implies an extended period of low-inflation, low-interest-rate growth—an environment that usually favors equities over bonds. But after such a rapid rebound, an equity market pullback would not be surprising. Tech stock valuations are elevated, and the U.S. elections create uncertainty around tax changes, government regulation and the re-escalation of China-U.S. trade tensions. Beyond this, we believe the market looks set for a rotation away from tech/growth leadership toward cyclical/value stocks. This also implies a rotation toward non-U.S. stocks, with Europe and emerging markets likely the main beneficiaries, in our opinion.
Our cycle, value and sentiment investment decision-making process scores global equities as slightly expensive, sentiment as neutral and the cycle as supportive. This leaves us neutral on the near-term outlook, but moderately positive for the medium-term, with slightly expensive valuations offset by the positive cycle outlook.
In the U.S., the move by the Federal Reserve (the Fed) to target average inflation is a significant shift. It should lengthen the expansion and delay the day of reckoning for equity markets from higher interest rates. Key uncertainties include the upcoming November presidential election between Donald Trump and Joe Biden. We believe a contested election, with destabilizing implications for markets, is becoming a risk. A Trump victory would likely benefit U.S. stocks (i.e., tax hikes averted, more protectionism), while a Biden victory would probably benefit non-U.S. equities (i.e., more harmonious foreign and trade relations). Another main risk is a second wave of coronavirus infections that causes renewed lockdowns. At this time, however, we expect that a second round of meaningful lockdowns will be avoided.
In Europe, economic indicators have rebounded following the easing of lockdowns. While infections have been rising, hospitalization and death rates remain low due to the shift in infections to younger age groups as well as more effective treatments. The region’s exposure to financials and cyclically sensitive sectors such as industrials, materials and energy gives it the potential to outperform in the second phase of the recovery, when economic activity picks up and yield curves steepen.
In the UK, Brexit uncertainty dominates the outlook. There is a year-end deadline for a European Union-UK trade deal, but negotiations are at a stalemate. Our assumption is that a deal will be reached on at least a bare bones free trade agreement, but the risk of a hard exit is uncomfortably high. Brexit uncertainty has been reflected in the FTSE 100 Index, which as of Sept. 16 has been the worst performer of the major developed stock indices this year. We like the value in the UK market on a longer-term basis.
The Chinese economy has seen significant improvement since the COVID-19 crisis, with many indicators now pointing to growth over the year. Fiscal policy is set to remain very supportive through the rest of the year, and we expect that credit creation will be solid.
The Japanese economy continues to lag the recovery of other major regions, with the services sector being particularly disappointing. Even with the continuation of Abenomics under new Prime Minister Yoshihide Suga, as well as the potential for further stimulus, we expect that Japan will remain a laggard in the recovery, due to constrained monetary policy and deflationary dynamics.
In Australia, fiscal and monetary policy should remain very supportive. The government is set to announce new measures at the October budget, and we think that the Reserve Bank of Australia will keep rates steady.
In Canada, consumer spending data, along with recent trends in housing and employment, suggests the economic recovery has commenced. We expect fiscal and monetary policies to remain stimulative for some time to come.
Economic views
- While government debt levels for developed economies are likely to increase by around 15% of gross domestic product (GDP) on average, we believe that fiscal austerity and tighter monetary policy are still some years away.
- We don’t expect U.S. inflation overshoots (and therefore, Fed rate hikes) to become a serious risk until 2023.
- Europe’s recovery should continue over the coming quarters, as the region is more exposed to global trade than the U.S. and likely to benefit more from a rebound in Chinese demand.
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Despite the escalation in trade tensions between the U.S. and China, we think the phase one trade deal will remain intact through the U.S. presidential election.
- We believe that the global recovery from the recession will lead to a long period of low-inflationary growth, supported by monetary and fiscal stimulus.
