Autumn is usually not on the side of the stock market bulls and it seems that the corona year 2020 will be no exception. The seasonal headwinds have been reinforced this year with a renewed increase in Covid-19 infections as well as the uncertainties surrounding the election of the US President and the Congress. In such a setup, it makes sense to take a step back and take a closer look at the overall weather situation.
In recent weeks, investors have often compared the recession triggered by the corona pandemic to the great financial crisis twelve years ago. As graph 1 impressively shows, the economic slump in the corona crisis was much deeper than in the financial crisis, but the recovery is now also clearly faster. The difference can be found in the enormous dual stimulus. In the banking and real estate crisis starting 2008, only the central banks went “all-in”, whereas in today's global pandemic not only the central banks, but also the governments have entered into crisis mode and are adopting extensive fiscal packages. Thus the stimulus measures are much more substantial today and are the primary driver of the economic recovery, but are also mainly responsible for the rise in capital markets, especially the stock market. At first glance, this upswing looks like a textbook “V-shaped“ recovery, which is also supported by leading indicators. But under the surface, it looks more differentiated, especially with regard to the labor market and consumer confidence, which are clearly lagging behind the great financial crisis. In certain areas of the economy, a recovery at different speeds can be observed .
So far, an agreement between Republicans and Democrats on a fiscal stimulus package 2.0 before the upcoming US elections has clearly been the base case scenario. In recent weeks, however, this has definitely become less likely. It is not impossible but the odds have clearly worsened. In our view, this is also the reason why capital markets are in a “wait and see” mode at the moment. Caution is therefore still warranted in the coming weeks, as the political developments in Washington are likely to keep volatility high. In this context, special attention will be paid to the television debates between US President Donald Trump and his democratic challenger Joe Biden, which kicked off last night with more to follow in the coming weeks (graph 2).
The following three scenarios are currently feasible:
￭ expected fiscal package of USD 1.5 to 2 trillion
￭ no deal before the elections
￭ a slimmed-down package with limited stimulus, aimed at supporting consumers
From our point of view, scenario 1 can be classified as improbable five weeks before the elections. Only a drastic deterioration of the Covid-19 situation would probably bring the two parties to the table to agree on such a package. Scenarios 2 and 3 we consider to be equally likely.
In exactly 34 days the US Presidential election will take place and the capital market has to deal with the increasing risk that there might be no clear winner on 3rd November. Only twice in history has there been a comparable situation, in the years 1876 and 2000. Twenty years ago, the haunting was ended by the Supreme Court after 35 days and the stock markets dropped about -5% during this period. The situation today, however, is much more complex and a stalemate could cause great uncertainty among market participants, at least in the short term.
We are sticking to our constructive attitude towards financial markets in the medium to long term, as the dual stimulus continues to work and hopes for a possible Covid-19-vaccine are also strongly supportive. In the short-term, we remain on the sidelines at an asset allocation level and leave the equity exposure at neutral. From a cross asset point of view, we continue to have a preference for equities over bonds. The setback in gold can and should be used to build up positions. Following this month's correction in equity markets, we see already a number of very selective companies where we would think first partial positions should be built up.
Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Author: Thomas Wille, Head Research & Strategy, Email: firstname.lastname@example.org
Editor: Alessandro Fezzi, E-Mail: email@example.com
Source: LGT Bank (Switzerland) Ltd.
Risk Disclosure (Disclaimer)
This publication is an advertising material / marketing communication. This publication is for your information only and is not intended as an offer, solicitation of an offer, or public advertisement to buy or sell any investment or other specific product. Its content has been prepared by our staff and is based on sources of information we consider to be reliable. However, we cannot provide any confirmation or guarantee as to its being correct, complete and up to date. The circumstances and principles to which the information contained in this publication relates may change at any time. Information that has been published should therefore not be understood as implying that no change has taken place since its publication or that it is still up to date. The information in this publication does not constitute an aid for decision-making in relation to financial, legal, tax-related or other consulting matters, nor should any investment decisions or other decisions be made on the basis of this information alone. It is recommended that advice be obtained from a qualified expert. Investors should be aware that the value of investments can fall as well as rise. Positive performance in the past is therefore no guarantee of positive performance in the future. Investments in foreign currencies are also subject to fluctuations in exchange rates. We disclaim all liability for any loss or damage of any kind, whether direct, indirect or consequential, which may be incurred through the use of this publication. This publication is not intended for persons subject to legislation that prohibits its distribution or makes its distribution contingent upon an approval. Any person coming into possession of this publication shall therefore be obliged to find out about any restrictions that may apply and to comply with them. In line with internal guidelines, persons responsible for compiling this report are free to buy hold and sell the securities referred to in this report.