Market Mondays #26

Last week in the financial markets: 

  • Joe Biden won the race for President while President Trump made a series of unproven allegations about voting in key states
  • Kamela Harris is set to make history as America’s first black, female Vice President
  • Joe Biden made his victory speech on Saturday and pledged to be a “president who unifies” 
  • Bitcoin crossed the $15 000 level for the first time since the end of 2017
  • On Wednesday, the S&P 500 rose 2.2 per cent, its best one-day gain since June, with technology stocks dominating once again
  • Palladium rallied to a 8 month high
  • The Federal Reserve kept its interest rates unchanged. The Bank of England also kept its interest rate unchanged at 0.1%
  • Ant Group’s IPO was halted by the Shanghai Stock Exchange
  • The euro area’s GDP expanded by 12.7% in the third quarter by comparison with the previous three months, bouncing back from recession
  • Uber, Lyft and other companies that work in the gig economy won a big victory in California when voters approved a measure that will allow them to avoid reclassifying their drivers as employees

Driving forces for the weeks ahead: 

Big US tech stocks emerge as election winners

As it became clearer that Biden would win the election during last week, shares of big tech companies such as Facebook, Microsoft, Apple and Amazon surged. The reason being that the predicted “blue wave” – where Democrats would take both presidency and the Senate, did not happen. 

The so-called “blue wave” would have been a dangerous scenario for Big Tech as it would have significantly increased the chance of a higher tax rate not just for business, but capital gains. Additionally, Democrats will be unlikely to introduce significant regulations against Big Tech, such as trying to break them up, as Congress would block such a motion. 

There is also another reason for the surge the last week as the FT reports.

“There was a lot of cash on the sidelines that waited for some clarity around the election,” said Stephen Dover, head of equities at Franklin Templeton Investments. “I have been surprised that in almost every communication with an investor the question I get is: what is an investor in cash to do?”

Much of corporate America is under siege by the coronavirus, corporate failings are ballooning and many workers are struggling to find jobs. Money managers are wagering that big tech companies will provide a haven in that environment.

Line chart of Rebased showing The 'FAAMG' trade is back on after the election

The pandemic has created one of the most extreme disparities between business models in history. Technology companies are the star performers of the US stock market this year, increasing profits through one of the worst global downturns since the Great Depression. While many travel, hospitality and entertainment businesses are on the edge of insolvency, the pandemic has increased demand for products from the likes of Apple and Amazon, as workers buy new equipment for home offices and businesses rely increasingly on software and other services. 

“Any type of asset that is long in duration combined with low inflation, low rate backdrop have become more valuable,” said John Porter, chief investment officer and head of equity at Mellon. “These big tech names are . . . bellwethers for this environment.”

Overall, the prospect of a divided government has investors betting that tax cuts signed by President Donald Trump will remain in place. It has also reduced, but not quashed, the risk of heavy-handed new tech regulation.

However, it is important to keep in mind that a potential lack of stimulus for several months could leave lasting damage on the economy or cut short the rebound underway, just as coronavirus cases accelerate.

What else we’re reading: 

  • What next for US economic stimulus? (FT)
  • Joe Biden constrained: how Wall Street positioned for divided US government (FT)
  • Biden Win Emboldens Bulls as Emerging Markets Signal Buy (Bloomberg)  
  • A $3 Trillion Investor Craze Implodes After Ant’s IPO Bust (Bloomberg)  
  • How economically damaging will new lockdowns be? (Economist)  

This week’s key events and data releases:

Monday: 

Tuesday: UK September ILO Unemployment Rate, Bank of Italy Monthly Report

Wednesday: Lagarde Speaks at ECB Forum on Central Banking

Thursday: US October CPI, Eurozone September Industrial Production

Friday: Eurozone September Trade Balance

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