12 November 2020
Have asset markets already been given all their gifts?
I cannot recall Reagan's election win, the news wasn't as well distributed back then and being at high school in Canberra all I really knew was a (B grade?) actor was the new President of the United States. I do recall every US Presidential election since and while it may be a selective memory on my part, it strikes me that the celebrations always seem to be greater when the Democrat candidate wins. This may be due to the idiosyncratic nature of each election; Clinton was young and came after 12 years of Republican rule, Bush/Gore took months to resolve, Obama was obviously an historic win and now we have the dancing in the streets with the Biden/Harris win. Trump was Trump.
The Biden win is NOT a surprise. Everything from betting markets to polls to forecasters all predicted a clear Biden win. The "relief" for many maybe that 2016 wasn't repeated but to be clear, the data all pointed to a Democratric Presidential win.
As has been written by many commentators, a Democrat President and a marginal Senate lead for Republicans is seen as the best combination for asset prices. What a sad state of affairs as it implies that reform isn't for equity markets, the markets prefer stimulus combined with a lack of Government interference. But Government intervention is now a given either in the form of the next round of fiscal stimulus (positive) or in the eventual and inevitable reduction in Government debt levels, (negative, as has to be partially funded through higher taxes). Staying away is no longer an option for Government, the status quo is an unstable equilibrium.
While the Pfizer news on a vaccine was definitely a positive surprise it's hard to argue that the market didn't at least partially believe a vaccine was coming or the recent surge in Covid cases would have had a more dramatic effect on equity prices. Now the macro vaccine news is out the distribution of the vaccine becomes a country by country, state by state, county by county, city by city, person by person issue. The macro though, is an unequivocal positive, good for everyone except the Trump administration.
Monetary stimulus is full steam ahead and while there is a little more fuel left in that tank we are already close to warp speed.
What more can the market hope for? A return to growth? Yes, but that is also partially priced and a faster return to normal will ultimately change the level of monetary stimulus.
So, has all the good news that's fit to print, been printed? What about the price action? Rates are low, there is nowhere else to put my money and everything is going up, even the Bitcoin bulls are back dancing in the streets.
In fact, price action of late in the S+P 500 points to a short term market top (for the market geeks it's a shooting star, lower close and RSI divergence all at once). However, it's also true that we are in the midst of a global bull market in asset prices. The question is whether it's sustainable?
This time it's different? Why are higher rates now a positive for stocks as opposed to the other times rates have risen in post March?
The S's ̶ seasonality and stimulus ̶ all point towards stronger stocks into year end, but what about sustainability? Watch for a short term period of weakness but not the start of a sustained downtrend. The simple analysis will rule until it doesn't and part of that will come from changes that Governments do or don't make. As we transition out of the pandemic, recovery asset classes will begin to differentiate themselves, something that should start to occur over the next six months, meaning now is the time to start planning for it.
At Beckon we believe real assets at the grass roots level will generate sustainable returns over the next five years, given non listed SMEs trade at substantially more attractive levels than most asset classes. We are actively searching for firms to invest in with growth equity, believing the subsequent productivity uplift will increase valuations. We are bullish on the world at the grass roots level whilst understanding that a period of differentiation is just around the corner.
Beckon is on Bloomberg...Bloomberg has just printed a story on us for those with access.
Lest We Forget
David (Bushy) Nolan
*Beckon Capital Pty Limited (ABN 49 628 013 678), authorised representative No. 001280538 of Fundhost Limited (ABN 69 092 517 087, AFSL No. 233045) (“Beckon”)