A phrase coined by James Carville during the 1992 presidential campaign is as relevant now as it was then. Carville helped former-President Bill Clinton to victory during a US recession. Now, with Joe Biden as President-elect, the focus will turn to the economic recovery from the Covid19 recession. That recovery is already underway, and we expect it will gather momentum over 2021 helping to propel risk assets higher.

A durable recovery is already underway

The US economy has been recovering for some time. GDP increased 33.1% annualised in Q3. It was from a low base, but it confirms clear signs of recovery elsewhere. US retail sales are higher now than they were in December 2019. The housing sector is performing well. And the unemployment rate fell back to 6.9%. That compares to 14.7% at the peak in April this year (Fig 1).

Fig 1: The unemployment rate is recovering rapidly from the peak in April 2020.

The election was a red herring

We wrote last month that investors needed to focus on the big picture for the election. And the big picture was monetary and fiscal policy stimulus. We expect the US Federal Reserve would continue to be ultra-accommodative with monetary policy. And we expect fiscal stimulus will be forthcoming. We saw this as the case regardless of who won the election. Focusing on the noisy, blustery campaign would be a near-term distraction from the ongoing economic recovery.

Covid19 means pent-up demand

Our view has been predicated on the likelihood of a vaccine. We don’t know when it will be available. But our simplistic view has been that each day brings us closer to that vaccine. Our base case is that consumer and business preferences will not change materially as a result of the election. Households will still want to spend. Businesses will still need to invest. We think that means pent-up demand when governments, households, businesses and countries are able to exit Covid19 restrictions. And that means very strong GDP growth in 2021.

Equity markets were not pricing this outlook

Equity markets have rallied from the early-2020 Covid19 troughs. We think that markets have been pricing in low rates for an extended period. That has supported large growth stocks that have driven the rally (Fig 2).

Fig 2: Tech stocks have led the equity market recovery in the US.

But the solid growth outlook, an earnings recovery that will begin in earnest in 2021, and conditions that will continue to favour corporate buybacks is yet to be fully priced. Our monthly Asset Allocation Review shows that we moved to a neutral position in US equities in mid-March after entering 2020 with an underweight position. By June we were overweight equities. We continue to think that US equities will offer returns above historical averages over the coming five years.

Remain focused on the fundamentals

Markets can be noisy and volatile. There may be more volatility to come in the wake of the election. But as James Carville urged Bill Clinton in 1992, it is the economy that matters. And the big picture now is that the US is entering a sustainable, lengthy period of growth. For us, that has involved adding to risk positions since the economy troughed in March. We were able to re-risk the portfolio as we said we would in our 2020 Medium-term Global Outlook, released in February this year. Reach out to our Portfolio Advisory Service to find out how we can assist you with managing your investment challenges.

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