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Market Update Nov 3rd 2020

Equities

After a summer lull, equity market turbulence is back. Last week marked the worst week for global stock indices since March, with the MSCI All Country World Index falling by 5.3 per cent over the five sessions. In the US, the S&P 500 lost 5.6 per cent, while the more tech-heavy Nasdaq Composite fell 5.5 per cent. Those falls came despite a series of impressive results for US tech groups and a strong rebound in the economy’s growth in the third quarter.

European stocks and oil suffered too with Brent crude dropped as much as 4.6 per cent to $35.74 a barrel on Monday, hitting its lowest level since May as economists downgraded their European growth forecasts in response to the roll out of stricter virus restrictions throughout the eurozone.

Along with rising caseloads of Covid-19, uncertainty surrounding the outcome of Tuesday’s presidential election between incumbent Donald Trump and his Democratic rival Joe Biden lies behind these jitters. The market turbulence reflects real fears that the election result will prove inconclusive, leading investors to panic that a volatile political climate could trigger violence and derail the economy. However, if that scenario is avoided there are reasons to be upbeat about how US markets could perform post-election. No matter who wins on Tuesday, the market is likely to get the fiscal stimulus that investors have been asking for. If Mr Trump manages to pull off a surprise win, then he has pledged to unleash a “very big” package. However, analysts think the real boon for equities would be a “blue wave”, where Democrats take not only the White House but both houses of Congress too.

Trump vs Biden: 4 policy plans US stock investors are watching

Four key areas many Wall Street banks and research houses think will affect the performance of American stocks are: taxes, infrastructure spending, regulating big tech and each candidates’ plan for the energy industry.

1.TAXES: Cutting the corporate tax rate from 35 per cent to 21 per cent was one of Mr Trump’s hallmark policy achievements. It provided a boost to American companies’ profits and spurred a rise in share buybacks that have in turn helped support the equities market. Democratic hopeful Mr Biden wants to increase the corporate tax rate to 28 per cent, still lower than the 35 per cent rate from when Mr Trump took office. Mr Biden has also proposed other changes to US tax policy.

Taxes would be the “most direct consequence of a Democratic sweep” for profits of companies listed on America’s benchmark S&P 500 index, according to Goldman Sachs. The Wall Street bank estimates that if all of Mr Biden’s tax proposals were implemented, it would reduce S&P 500 earnings by 9 per cent.

Stocks that would take the heaviest hit would be those that were the biggest winners from Mr Trump’s cuts including AT&T, credit card provider Discover Financial and hotel operator Hilton Worldwide, according to JPMorgan Chase. Strategists at Société Générale warned that groups with weak credit quality and low effective tax rates could be especially vulnerable, highlighting drugstore chain Walgreens Boots Alliance and General Motors.

2. INFRASTRUCTURE

If Mr Biden is victorious, investors expect a large boost to infrastructure spending as Democrats look to fund their own Hoover Dam-esque projects. It could lift stock prices and help to offset increased corporate taxes that Democrats plan to pursue, analysts say. “A large increase in fiscal spending, funded in part by increased tax revenue, would boost economic growth and help offset the earnings headwind from high tax rates,” Goldman strategist David Kostin said. That would benefit companies in the construction industry, including Caterpillar, Martin Marietta Materials and Jacobs Engineering, according to JPMorgan.

Mr Biden’s infrastructure spending plans would provide a large boost to the economy that would “have a much bigger fiscal multiplier than anything Trump has put on the table to date”

3.TECH REGULATION

Big technology groups including Google, Alphabet and Facebook have come to dominate the US stock market; along with Apple and Microsoft they account for more than a fifth of the S&P 500. It is why calls to more closely regulate or even to split some of the groups in two have been followed so closely by investors.

Corporate America is breaking with Donald Trump!  Tech companies have already increased their spending on lobbying efforts, knowing sweeping changes could soon arrive, regardless of whether a Democratic or Republican president is in the White House. Democrats, including Elizabeth Warren, have called for Amazon and others to be broken up. Yet it was the Trump administration which fired a warning shot this October, when the Department of Justice sued Google for antitrust violations. “When companies begin to dominate, people get afraid of their power,” said Lee Spelman, head of US equity for JPMorgan Asset Management. Companies with user generated content, including Twitter, Facebook, Pinterest and Snapchat, are also in the crosshairs of policymakers in Washington. Société Générale strategists say the stocks of those companies could be in for a rude awakening if Mr Biden is elected.

4.ENERGY

Stark differences in each candidates’ energy policy are also expected to have a significant effect on America’s stock market.  The election comes as energy groups are in the throes of a painful period caused by the fall in oil prices, the coronavirus crisis and the global transition towards cleaner forms of energy. The S&P 500 integrated oil & gas index, which includes oil majors ExxonMobil and Chevron, has tumbled 50 per cent since the start of 2020. Strategas, a boutique research and advisory group, said a Trump victory next week would be a boon to the sector. In addition to supporting energy tax subsidies and rolling back clean air emission standards, Mr Trump has also backed the use of federal lands and waters for drilling. In contrast, Mr Biden has pledged to “transition away from the oil industry” and has also outlined a plan to spend $2tn within his first four years in office to cut carbon emissions and electrify the transportation sector, among other initiatives.

The first big question for investors and the market is will the election result will prove conclusive? Financial Markets tend to fear uncertainty more than bad news itself!

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