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Monthly Market Commentary - November 2020

November was an extraordinary month. Joe Biden became the US President-elect, but Donald Trump has refused to formally concede defeat.

Jon Cunliffe

in Fiduciary news


November was an extraordinary month. Joe Biden became the US President-elect, but Donald Trump has refused to formally concede defeat. Pfizer, Moderna and Astra Zeneca all published better-than-expected results in their phase three Covid-19 vaccine trials helping the Dow Jones Industrial Average record its best month in US dollar terms for 34 years – and its best November since 1928. Global value stocks outperformed global growth stocks by as much as 10% in just eleven trading sessions in the middle of the month.

All these developments are related. Whilst Mr Trump has not yet conceded, it is looking increasingly like a formality that Mr Biden will enter the White House in January, presiding over a split Congress. Historically, US equity markets have tended to perform best under a Democrat president without control of both houses. Certainly, this time around, the concerns of a more radical reform agenda – with higher capital gains and corporate tax rates under a so called Biden “blue wave” – seem highly unlikely unless the Democrats can win the two Georgia run-offs for the Senate in early January.

Elsewhere, the “reopening narrative”, driven by the positive vaccine news, caused an almost unprecedented rotation out of this year’s strongly performing quality-growth stocks into the beaten down cyclical and value plays. As a result, consumer staples, healthcare and big Tech fell prey to profit taking, with banks, oil majors and retail all boosted by the light at the end of the tunnel the vaccine news gave investors.

The UK equity market was a key beneficiary of this market rotation. The FTSE 350 fell 35% earlier this year and, whilst it had recovered just over half of its losses by mid-year, it resumed its down trend as we headed into November. The vaccine news was the catalyst for the largest monthly gain in UK equities since January 1989, with the FTSE 100 rising more than 12% over the month, as investors rushed to rebalance portfolios in favour of growth-facing assets.

As far as the global economy and financial markets are concerned, we are at a fascinating juncture. Global growth is likely to downshift over the next 2-3 months as US activity slows on rising Covid-19 cases and Congress is still unable to pass any fiscal stimulus measures to replace the expiring CARES Act at year end.

However, looking beyond the first quarter, we would expect a strong growth rebound driven by the tailwind of ongoing monetary policy support, some further fiscal stimulus – and a gradual reopening of the economy on the expectation that a number of Covid-19 vaccines will be safe to administer. A full return to normal, however, is likely to require 60% of the world’s population to be vaccinated in order to break the link between the infection and economic activity, so this will probably take us into 2022.

This leaves investors with a temporal mismatch: a bad economic environment over the next few months with ongoing pressure on the corporate sector, but the prospects of a much brighter outlook once we head through the Spring. Financial markets have chosen to look through the near-term environment and instead focus on the prospects of much better growth and a further rebound in corporate profits over the balance of 2021 and beyond.

On balance, this appears a sensible approach to adopt. However, the strong upturn in activity will still require considerable policy support and, with fiscal policy much less supportive next year (unless the Democrats take the Senate), there will be ongoing pressure on central banks to ease monetary policy further. Given the high valuation of global equities, any policy missteps will be severely punished by markets.

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