Oh what a night

Marketwatch confesses that he has been extremely distracted this month.  The events surrounding the US Presidential election have been jaw dropping.  If these events had been an episode or two on the West Wing we might have thought it was far-fetched as the series, after all, is a fictional account of Washington.

But the action has outdone anything fiction can offer.  Because it is not his intention to send any of Venta’s clients to an early grave with apoplexy, Marketwatch is not going to offer any political opinions about the election.  There is plenty of media comment on offer if you want to drown yourself in opinion.  He will, however, offer some observations on how stock and bond markets are moving.

To say that markets have reacted positively to events is an understatement. Last night, for example, all indices moved upwards significantly. This was primarily on the back of two issues.

Firstly, the drug company Pfizer revealed very positive test results for their COVID-19 vaccine which is in its final stage trials.  The clinical trial is still continuing, and the results are preliminary, but they look promising.

The second is that a Team Biden victory promises to unleash another wave of stimulus spending.  Figures of $2.5 trillion or thereabouts are being bandied around.  The market smells profit in this.

Marketwatch is normally a positive soul, and understands that financial markets are desperate for good news.  Wonderful news on which they can trade.  And the rest of the world, watching the (currently) biggest economy surging, is following suit.

So with some trepidation, Marketwatch would like to offer the following observations.

The news of a successful vaccine around the corner has energised share prices in candidates such as cruise companies.  The assumption is that, hooray, the saviour is here and we can all go back to normal.  That actually depends on many factors including the rate at which vaccines can be licenced and distributed and applied worldwide.  That may be some months away and the surge may be premature.  The seven-day moving average of reported infections reached a record last Wednesday and daily case counts are on the rise in most states, according to data from Johns Hopkins University, a leading health researcher.

Share prices indicate the value of companies.  The large increase in share prices indicates that the market thinks that companies are worth more now as they were before the pandemic commenced.  A simple example is the Standard & Poors 500 index on 19th February 2020 stood at 3,386.15.  On 9th November 2020 it was 3,550.50.  But although economic growth in the US is good, it has a long way to go before it gets back to where it was.  The unemployment rate in September was 7.9% compared with pre-pandemic levels of “full employment” at around 3.5%.  In a note to clients, JP Morgan Chase, a leading investment bank, noted that “The level of [unemployment] filings is trending down over time, but this downward trend has flattened noticeably.  This is consistent with the idea that the labor market continues to recover, but that the pace of improvement has moderated.”

Team Biden is committed to a higher taxation regime and a further increase in government debt to fund their stimulus programme.  Hardly the stuff of Wall Street celebrations but the stimulus effort should reap profitable rewards if, as intended, it is directed towards infrastructure.  But President Trump’s proposed package, which was a mere $1.8 trillion, was meeting resistance from his own party which is not generally pro-debt. His own party have a very much reduced number, $500 billion, in mind. It is more than likely, although not certain, that the US Senate will remain in Republican hands. This will set up the classic conflict scenario, a Democratic President, a Democratic House of Representatives, and a Republican Senate. Unlike our Senate, the Republicans will hold the whip hand in decision making; legislation cannot be made without the consent of both chambers. And Mitch McConnell, the Republican leader in the Senate is a known obstructionist who caused Barack Obama much grief. So good luck with the tax increases as well.

Where did that leave us?  To be honest, Marketwatch is not sure.  There are many variables and the picture is really uncertain.  And, as we have said, the world is watching, and their markets are holding their breath.  Marketwatch is not permitted to provide investment advice.  But he can offer you the observation that, it seems to him, risk is high and unless you are a highly sophisticated investor you would think twice before putting your hard earned money up for grabs.  But, as I say, this is just an observation.

The soap opera which is unfolding is horrible and fascinating.  It is like driving past a car crash; you have to stop and look even if you don’t want to.  Much of our future in Australia depends on how this plays out in the US.  Our alliances matter, and we cannot go it alone.  Let us hope that the injury toll is as small as possible.

And to cap off a tumultuous month, Marketwatch decided to revisit a long-time favourite.  The ever consistent, always great, Wynns Coonawarra label.  The 2015 Shiraz would easily go longer, but Marketwatch’s need was great.  You will never get a bad or even indifferent wine from this winemaker.  Do not forget them on your Christmas list.

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