Comment

This labrador market won't be affected by the US election - or much else 

Central bank stimulus has neutered almost all downside risks

Political scientists, psephologists and historians will be sifting through the debris of the 2020 US presidential election in search of meaning for months and years to come.

But there are two things that we can already say with a high degree of certainty: the pollsters had no idea what the outcome would be ahead of time and the markets didn’t care either way.

It is for other pages in this paper to perform the full post-mortem on the latest abject failure of the polling fraternity. Perhaps they should have used fresher goat entrails.

But as far as the markets were concerned, it didn’t matter that nobody knew what was going to happen as investors appeared to be perfectly happy with any and all potential outcomes.

Every US election is pivotal for the country and by extension the world. For many, this one carried extra jeopardy.

Second-term presidents, unencumbered by the need to ever win another election, tend to throw off the shackles. Many convinced themselves that the possibility of Donald Trump back in the White House, with the dial turned up to 11, meant the very future of civilisation was on the line.

But here’s the thing: as far as investors were concerned, the election was all a bit meh. They took every twist and turn of the unfolding saga in their stride and kept on rising as the rest of the world was fretting over when exactly Clark County, Nevada, would finally get its act together and complete the count.

Markets rose on election day itself as investors started betting that the polls had got it right and Biden would win. Then overnight, S&P 500 futures rose as the early indications suggested the polls might be wrong and Trump looked set to win a second term.

The markets dipped when Trump prematurely declared victory and threatened to take the election to the Supreme Court. But only briefly.

In essence, the thought process of investors appears to have run something like this: Joe Biden will win a landslide? Good news! That means he’s bound to come up with a huge stimulus package and a rising tide that will buoy all equities.

What’s that? Donald Trump might win? Good news! That makes it less likely the tech companies will be broken up or the oil industry will suffer under a new Green Deal.

Hang on. Now it looks like Biden will indeed win but the blue wave has failed to materialise and there will be political gridlock in Washington. Good news! That means the new president won’t be able to reverse Donald Trump’s corporate tax cuts.

Panglossian hardly covers it.

It must be somewhat galling for a president who spent so much of his time in the Oval Office obsessing about the performance of the stock market to find the feeling is not reciprocated and Wall Street is indifferent to his fate. (Then again, any such realisation would require at least a scintilla of self-awareness, so maybe not.)

America’s S&P 500 climbed 7.3pc to record its best week since April, including its first four-day winning streak since 1982, and the tech-focused Nasdaq rose by 9pc.

Global markets took similar delight in bidding Trump adieu. Japan’s Nikkei 225 hit its highest level since November 1991 and the FTSE 100 enjoyed its strongest week since 1982. Cheerio, cheerio, cheerio.

Cast the gaze back a little further, however, and you see the bigger picture. Since the beginning of September, the US stock market has fallen and the dollar and yield on Treasury bonds have crept up.

That’s because, much like in Europe, the second wave of coronavirus is taking hold in the US and there’s growing expectation of more monetary stimulus from the US Federal Reserve to fight the anticipated economic slowdown. 

The obvious conclusion is that investors are less interested in the inhabitant of 1600 Pennsylvania Avenue than they are in the person who works at the Marriner S. Eccles Building – home to the Fed.

Indeed, the US election occurred in the same week as Jerome Powell, the chairman of the US central bank, hinted it would provide more stimulus and the Bank of England pumped a further £150bn of quantitative easing into the economy. Who’s to say these weren’t the more important events as far as the markets were concerned.

Even the failure of the so-called “blue wave”, with Democrats now unlikely to take the Senate, is less problematic than some are making out.

Yes, the two parties have wrangled over stimulus packages and this result means the wrangles will continue.  But the disagreements have been about detail – whether the package was $1.8  trillion or $2.2  trillion –- rather than broad direction. And Biden was made vice president by Barack Obama precisely for his ability to “reach across the aisle”.

Either way, investors appear to be betting that if Washington doesn’t come through with fiscal stimulus, the Fed will step up with more of the monetary variety.

Ultimately, we’re living in a world where central bank stimulus has neutered almost all downside risks. Even a global pandemic with thousands dead and a crippling recession in the world’s largest economy causes only a temporary blip in the seemingly inexorable upward trajectory with the S&P 500 having made gains for the year to date.

This run will end one day. Everything does. But it won’t be halted by something as trifling as a US presidential election.

Bulls and bears? Do those labels have any meaning any more? This is a labrador market – monomaniacally cheerful irrespective of circumstances. Saddam Hussein could have walked through the doors of the White House and investors would have greeted him with wagging tails before rolling over to have their tummies tickled.