InvestmentsNov 25 2020

Beyond the election: The outlook for US equities

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DO NOT USE T Rowe Price
Beyond the election: The outlook for US equities
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At the forefront is undoubtedly the impact of the Covid-19 pandemic. To date, 12.3m people in the US have been infected with the coronavirus and 257,000 have died.

The effects of state-wide lockdowns have been dramatic, just as they have in many other countries around the world, but the US’s financial support programmes were just as huge – at least initially. The Coronavirus Air, Relief and Economic Security (CARES) Act saw $2.2trn (£1.6trn) rolled out in support for individuals and businesses of all sizes.

President-elect Joe Biden will have the unenviable task of attempting to secure more stimulus against an unfavourable backdrop

However, recent efforts at agreeing additional support have foundered. With US government looking likely to remain divided for the next two years, president-elect Joe Biden will have the unenviable task of attempting to secure more stimulus against this unfavourable backdrop. 

Concerns have also been raised about the long-term cost of such programmes. However, Elliot Hentov, head of policy research at State Street Global Advisors, believes there will be “no problem” for the US in servicing its debt burden.

“Debt servicing costs will remain low even if there is a gradual rise in long-term yields in the coming years,” he says. “The Fed is still buying large amounts of Treasuries and could always intervene to slow down any major jumps in interest costs.” 

The Federal Reserve launched a $700bn quantitative easing programme in March to buy US Treasury bonds and inject liquidity into financial markets.

For Neil Mackinnon, global macro strategist at VTB Capital, the longer-term risk in this regard is from “quasi-debt monetization”, which he says “threatens a return of much higher than expected inflation and sustained weakness in the US dollar”.

As the biggest economy on the planet, the election and the impact of the pandemic in the US have been of global interest. Julian Cook, US equity portfolio specialist at T Rowe Price, says the election outcome – with a likely split between a Democrat majority in the House of Representatives and Republicans controlling the Senate – will be “less onerous for policy change than could have been the case”.

News of potential vaccines has also “led to greater optimism of returning to more normal levels of activity”, he says.

“We would agree that a widely adopted vaccination program would facilitate that, though perhaps it’s a little too early for strong views regarding wide vaccine supply/availability and the rate of uptake globally,” Mr Cook continues. “It seems that we may be in an environment of non-synchronous global growth for some time.”

A return to growth?

Geoffrey Yu, senior EMEA market strategist at BNY Mellon, says it is likely the pandemic will result in “significant economic scarring”, with many jobs lost during 2020 unlikely to return. 

Continued fiscal relief packages could limit the long-term damage and a quick return to trend growth is possible Elliot Hentov, State Street Global Advisors

Working from home could have a profound effect on the structure of economic growth, Mr Yu says, with “significant investment into the economy” required to create jobs.

However, SSGA’s Mr Hentov says: “Continued fiscal relief packages could limit the long-term damage and a quick return to trend growth is possible, maybe even slightly higher given widespread productivity improvements during the Covid-19 crisis.”

Damian Handzy, head of research at Style Analytics, says the pandemic has been “both damaging and disruptive – and investors must pay attention to both aspects”.

“The economy – not the market – will be suppressed for several years and at the same time Covid-19 is disrupting industries,” he says. “Companies that can adapt to people’s changed lifestyles can thrive. The US approach of solving problems by innovating will help its economy come out of this ahead of others.”

A consumer-led recovery?

The retrenchment in economic activity has undoubtedly hit the US hard. But with many people saving up money and paying down personal debt during the pandemic period, Ian Jensen-Humphreys, portfolio manager at Quilter Investors, says the US consumer could prove vital to a near-term recovery.

“Once confidence is restored and the pandemic is fully in the rear-view mirror, helped by recent vaccine announcements, the economy could receive a shot in the arm,” he says.

However, Bo Brownlee, portfolio manager at Secor Asset Management, argues that investors should be wary of putting too much emphasis on a cyclical recovery fuelled by positive vaccine news. Technology companies are likely to continue to lead the market in the next two years, he says, with cyclicals and financials lagging “despite an expected strong snapback”.

Some sectors, especially retail, have likely been permanently damaged by the events of 2020, Mr Brownlee adds, while others face a “slow road back as behaviour normalizes” – in particular airlines, hotels, and office rentals.

“While these stocks have enjoyed the euphoria surrounding the good news on the vaccine front, it is no sure thing that their rally has any legs to carry them through the next few years as we emerge from the pandemic,” he says.

For Cormac Weldon, head of US equities at Artemis, the consumer-led investment picture is bright for the US – but the recovery path “is likely to be uneven”. Air travel is unlikely to return to normal before 2022, he predicts, while there are “many steps between the current lockdowns and plazas full of carefree consumers”. 

“Employment data has been impressive to date but will soften in the short term,” Mr Weldon adds. “That said, job creation in stronger sectors – manufacturing, housing-related, technology, health care, grocery stores – should absorb some of this weakness.”

Whatever the next few years holds as the world recovers from the shock of Covid-19, the US’s prospects will have a significant impact on the rest of the global economy.

Nick Reeve is a freelance journalist