Monthly Market Outlook – September/October 2020

Whilst the pandemic continues to dominate the headlines, the US election campaign is now in full swing, Brexit negotiations press on, and the European Union continues to review the details of their recently proposed recovery fund. Markets are likely to remain volatile as these events unfold.

Markets were already expecting a turbulent US election, but the news that President Trump tested positive for COVID-19 added a further sense of nervousness. The event held in the White House to announce the nomination of Amy Coney Barrett to the Supreme Court, where guests mingled without masks or appropriate social distancing, was the catalyst for a cluster of cases. With this news markets initially dipped, then recovered, as Trump appears to have made a swift recovery. Having been hospitalised, Trump says he now feels in good health. A day after returning to the White House, the President, in a flurry of tweets abruptly cancelled negotiations over the next US stimulus package, and said he would only resume talks after the election. After the stock market reacted negatively, he relented, and now appears ready to make a deal again to boost his economic credentials.

After a chaotic first presidential debate, opinion polls appear to indicate that Joe Biden is leading Trump ahead of the November election. As it stands, the Democrats have a good chance of taking control of both Houses of Congress; a so-called “blue wave”. This outcome would make it easier for Biden to enact changes, one of which would be the reversal of many of the tax cuts that the Trump administration has introduced. While it is unclear whether a stimulus bill will pass ahead of the election, should the Democrats take control, it is likely they will continue to spend heavily to stimulate the economy. The real danger for markets in the short run would be a disputed election, which could see a period of post-election infighting that would bring further fiscal support into question as the pandemic continues.

In the UK, post-Brexit trade negotiations have resumed, but the main sticking points remain unresolved. Further negotiations are needed to get a deal which is in everyone’s interests, but at present it looks as if the transition deal may end without a new trade agreement. At the same time, the EU continues to debate the details of their recently proposed €750bn recovery fund. The fund remains a historic breakthrough, bringing sizeable financial support for countries worst hit by the pandemic; however, concerns are mounting regarding its eventual implementation. This is particularly pertinent as Europe, and a number of other regions, contend with a second wave of the virus. Monetary and fiscal policies should remain complementary, and the support they provide may be needed for a long time.

Clearly, the remaining period leading up to these events will see volatile markets. A contested election, will undoubtedly add to market volatility beyond the 3rd of November. However, a great deal of monetary and fiscal support remains in place. With long-term low interest rates, equities should continue to be the favoured asset class. We encourage investors to look through the day-to-day noise and focus on companies with attractive long-term growth prospects, robust business models and strong balance sheets. In the end, a sustained recovery in economic growth may depend on the development of an effective vaccine. Progress on treatments and effective vaccines are likely to be more important for long-term sentiment than any of these events.