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Hedley Market Commentary - November 2020

Market Commentary – November 2020


By Neil Worsley, Investment Strategist


With the US election upon us and with financial markets likely to be driven or influenced by the outcome, what can we expect to happen with the different candidates in the White House?


If we assume that either candidate will get a clear victory, then equity markets in the US are likely to rise as the political uncertainty disappears. A narrow Biden victory could be problematic as President Trump is then likely to dispute the outcome, especially as the high level of postal voting, which he calls open to fraud, will have played its part. Any dispute could then end up in the Supreme Court which is now very conservative leaning and matters could become uncertain and messy, exactly what financial markets hate. Let us leave this outcome for now.


In the event of a Biden victory and a clear majority in both Congress and the Senate, we would likely see increases on capital gains tax, corporates, dividend tax and certainly increased taxes on higher earners, although this may well be deferred for the time being until the Covid crisis subsides. We will also see some form of stimulus plan be enacted with around $2.5 to $3 trillion pumped into the economy. If, however, we see the Senate remain in Republican control then tax increases are very unlikely to be passed and a lower stimulus package will almost certainly be implemented. A stimulus plan is likely whoever wins the election, but it will be bigger under the Democrats. Financial markets are now set up for a Biden victory with control of both the Senate and Congress so any deviation from this would cause some shorter term volatility. In the short term, a Biden victory could induce special dividend payments from US companies as they attempt to raise payouts before tax increases take hold and it could also stimulate corporate activity (mergers and acquisitions) for the same reason. There have been over 5500 deals involving private equity in the US alone this year as owners seek to exit before any possible change in the tax regime. There is also estimated to be around $1 trillion of private equity money sitting on the sidelines which could enter the market over the next 12 months. In trade policy, a Biden presidency is much more likely to reach out to ‘old’ friends and partners as well as established institutions in a bid to bring together a more coordinated approach to the world’s problems and sideline the America first mantra.


Under a continued Trump presidency, depending on the nature and size of any victory, then markets may well rise on the outcome, Treasuries because any stimulus plan may be lower and government spending reduced, and equities because President Trump is seen as stock market friendly and potential tax increases would not materialise. Other than that, it would be very much business as usual (or unusual) with the unpredictable once again being the predictable.


Whatever the outcome, we will likely see a measure of short term volatility as markets settle on some form of settled outlook. However, to some extent, financial markets have already been factoring in some of the uncertainty already so that anything but that close run outcome may well be welcomed, at least for 24 hours.


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