We’ve had an eventful year so far, no doubt about it!
It’s been an eventful year for the markets too, and in this recovery period, we wanted to ask Yann Furic, our Senior Manager, Asset Allocation and Alternative Strategies, about the economic and financial outlook for the last few months of the year. The big issues of the day were the focus of our discussion.
ISSUE: U.S. elections
What impact will the November 2020 elections have on the economy? Will the winning of a majority in Congress by the Democrats or by the Republicans be a key factor for the future course of events?
There are significant differences between the two parties. A second term for President Trump would certainly mean a tougher stance on China, with trade talks between the U.S. and China currently at a standstill. It would also favour a return to manufacturing production in the United States and a reduction in environmental regulations, among other things.
On the other hand, a Biden presidency would likely mean increased corporate taxes and infrastructure spending, particularly on environmental projects, as well as increased regulations and policies aimed at reducing social inequalities.
It’s a presidential election year, but we mustn’t forget that the composition of the two houses of Congress (the Senate and the House of Representatives) could also change. Currently, the Senate has a Republican majority while the House of Representatives has a Democratic majority. So the question is not only which party will win the presidency, but also which party will control which house of Congress.
The elections will be held on November 3, but it’s likely that the results will not be known that same evening since voting by mail is expected to be heavy due to the pandemic.
ISSUE: A second wave of COVID-19
The possibility of a second wave of the pandemic has been raised for several months now. How might this threat impact the global and local economy?
The threat of a second wave is very real, as already seen in some European countries such as Spain and France. For now, many manufacturing or industrial sectors are partially or even fully reopening in North America, and government officials are monitoring the situation closely, but a return to complete lockdown is not yet on the table.
Small businesses have paid the price for this crisis and many have closed their doors permanently. The sectors most affected (restaurants, tourism, travel, leisure and hotels) have still not recovered and have seen multiple layoffs and requests for government assistance. As for larger companies, they are benefiting from the strength of the recovery and should quickly return to pre-pandemic levels of activity. In addition, the Canadian budget deficit is estimated at $343 billion for the 2020-2021fiscal year.
Some parts of the world like Israel have had to return to lockdown due to an escalation in the spread of the virus. In the case of Melbourne, Australia, citizens have had severe restrictions placed on them. This shows that the risk is present and that the economic repercussions of a re-implementation of the most restrictive health crisis measures are viewed with apprehension by all the stakeholders involved, whether governments, businesses or the public.
ISSUE: Tensions between the U.S. and China
These tensions do not appear to be abating. Are they still focused on trade, or are there other issues involved?
Tensions between these two countries are growing. It’s not only trade considerations that are at issue, but also new technologies, as evidenced by the forced sale of TikTok to American interests, under the threat of a ban on carrying on its activities in the United States.
In addition to repatriating manufacturing production to the United States, the disputed measures seek to limit China’s access to new technologies, such as artificial intelligence, robotics and telecommunications equipment.
A Biden administration would not be easy on China, but the tone and methods of negotiation used should differ greatly from those employed by the current administration. A less aggressive approach could reduce market volatility, caused among other things by the fact that U.S. foreign policy is being managed on Twitter.
ISSUE: The rise of FAANG stocks
Now let’s look at the stock markets. The technology sector has performed very well. Can its predominance continue much longer?
We can now talk about the FAANG stocks: Facebook, Amazon, Apple, Netflix and Google (Microsoft is also often included in this group). These companies were already well known to the public, but the pandemic, self-isolating at home and telecommuting have increased their usefulness and accelerated the digital revolution.
From a profit perspective and compared to other economic sectors, the pandemic has had little negative impact on these companies. It has even been positive for some like Amazon, since e-commerce has grown even bigger than before.
It’s more on the valuation side that things get sticky. How do you properly value growing companies when interest rates are so low? We have just experienced a brief market correction in these stocks.
We believe that a strong economic recovery spurred by additional fiscal measures and a vaccine should favour more cyclical stocks such as financials, industrials, energy and commodities. This does not mean that the price of technology stocks will drop sharply, but rather that, overall, more cyclical stocks will rise again and gain in importance. The market dominance of the technology sector will therefore not be as strong.
For more information on this subject, see our recent Focus on Finance express article:
MAJOR CONCERN: Inflation
Inflation fears stem from the massive liquidity that the central banks of many countries have injected into their respective economies. Putting all this money into their economies will devalue their currencies.
Currently, the U.S. Federal Reserve (Fed) anticipates a risk of deflation and falling prices, rather than inflation. This same argument was used when the Bank of Japan implemented quantitative easing measures. A similar situation also occurred during the financial crisis of 2008. In both cases, inflation never reached the targets that the central banks had set. Despite their monetary easing measures, the banks did not cause a rise in inflation.
This time around, one of the arguments in favour of raising inflation is the scale of monetary policy rollout. Even so, the speed at which money circulates, which is a good indicator of future inflation, remains low, meaning that inflation itself is likely to remain muted in the near term.
In the longer term, inflation could rise, but more than a decade of quantitative easing in the United States and Japan has still had no effect.
Has this analysis raised questions about the impact of these events on your investments? Don’t hesitate to contact your advisor to discuss this. He’s available and ready to help you.
The information contained herein has been obtained from sources deemed reliable, but we do not guarantee the accuracy of this information, and it may be incomplete. The opinions expressed are based upon our analysis and interpretation of this information and are not to be construed as a recommendation. For any questions, don’t hesitate to contact your wealth management advisor or your tax specialist, accountant or legal advisor.