News, Views, and Commentary:

“Move on, nothing to see here”…….  A remarkable 2020 is typified in just a couple of sharemarket statistics.

  • October saw the world’s financial markets get the jitters unsurprisingly through the combination of resurgent virus outbreaks and the looming US elections – or more particularly the threat of a disputed election result leading to all sorts of problems. The US Dow Jones index fell -4.7% through October while our own All Ordinaries index petered out to a small gain of around +1% for the month after starting well and then fading.
  • Then in quick succession in the first week of November, news of extremely promising vaccine trials and the US election result gave the markets cause for a huge sigh of relief. It has been a hold-on-to-your-seat ride in share markets around the world since then – Australia’s sharemarket is +9.8% since the start of November, while the US Dow is an incredible +11.25%.
  • And now for the remarkable part: for this calendar year, 2020, the Australian share market is just -2.9%, while the US Dow is +2.95%. If we were sitting together having a chat on 1 January 2020 and we somehow imagined all the things that have happened since then – from state border closures and lockdowns, to a near-complete shutdown of international travel, to more than 1.35 million deaths worldwide – I reckon we’d be expecting to see a little more damage to stock values.

So, are markets still ignoring the risks? Is there still a dramatic collapse around the corner? Well no-one can guarantee anything but we are definitely more confident now that a number of the worrisome downside risks of the past six months are subsiding:

  • the recent vaccine announcements are very timely given how rapidly Covid 19 is spreading through Europe and the US, particularly as the northern hemisphere heads into winter;
  • and in January 2021, after some predictable disputes are decided, Joe Biden will take the presidency. But importantly it appears the Senate will remain Republican and the financial markets see this as a “safe” result in that the chaotic Donald Trump is gone but the Democrats do not have total control.  Market-friendly tax policies, for example, won’t be immediately unwound.

On balance the medium term is looking better for the world economy and also for risk assets, but the short term has some risks which may cause volatility. We see a couple of these as being:

  • The US Senate wrangling over the next planned stimulus packages, causing delays even beyond the Biden inauguration. This gives the potential for short-term volatility in equities and credit markets over the next three months.  Of course, this could present good investment opportunities too…
  • A slower than anticipated rollout of Covid vaccines. The market currently anticipates broad vaccination no later than mid-2021, and if there is a delay this could cause a repricing in financial markets. That is, short-term volatility.
  • Heightening geopolitical conflicts have the potential to derail economic recovery – this is particularly relevant for Australia given our economic dependency on China.

News of the vaccine breakthrough hasn’t immediately improved expectations for the time it will take the US and European economies to return to their pre-pandemic size, since most economists had already factored in a successful vaccine at some point. US and Eurozone policymakers expect their regions to recover to pre-Covid levels in 2022, see chart below.

Sources: RBA, Quilla Consulting, Johns Hopkins Coronavirus Resource Centre, PIMCO Asset Management, Wall Street Journal.