Joe Biden seems likely to win Tuesday’s Presidential election. We look at the potential impact on financial markets.
We focus on Brent as the global benchmark.
Oil prices led the rout back in March, as we predicted here at the time. And as today’s chart shows, prices moved sharply lower again this week, closing down 7.5% at $38.46/bbl.
Critically, they fell out of the “flag shape” that has dominated trading in 2020. Flag shapes occur as the bulls and bears fight for leadership, and prices then often move quite sharply once the new direction is established.
The issue is that even the bulls have accepted demand has not recovered as they had hoped. And they are starting to realise OPEC+ is desperate for cash. Last week Iraq, OPEC’s second largest producer, warned its economy is threatened with “collapse”. A Biden win would further increase the pressure:
- On the demand side, he will rejoin the Paris Accord, and has published a plan to achieve net-zero by 2050
- He is also likely to follow the EU in promoting a Green Recovery Deal, and increase support for electric vehicles and renewable energy production
- In geopolitics, he will likely aim to revive the Iran nuclear deal, which would lead to increased Iranian crude exports, and leave Saudi Arabia in a difficult position
We discussed President Trump’s likely priorities for a second term last week. President Biden’s will be quite different.
We focus on the US S&P 500 Index as the world’s major stock market index.
The S&P has its worst performance since March last week, falling 5.6% to 3270, whilst the VIX volatility index rose to 38.
Apple’s stock lost $111bn on disappointing results, suggesting investors may be reconsidering their love affair with the tech sector.
The chart shows how NASDAQ’s performance since 2016 has closely mirrored that of the dot-com bubble between 1995-2001. The difference, of course, is that the FAAMGs (Facebook, Apple, Amazon, Microsoft and Google) are currently 25% of the S&P 500, having delivered 72% of its gains since 2017. If tech now repeats its post-1999 performance, as many chartists are suggesting, then it won’t just be the NASDAQ that is hit.
A Biden win, particularly if accompanied by a win in the Senate, would likely deliver major change in fiscal, social and industrial policies. In markets, we would expect:
- Substantial increases in Corporation Tax and targeted increases in personal taxation
- Trump’s support for fossil fuels would be redirected towards decarbonisation in both transport and power generation
- Biden will also not share Trump’s obsession with higher stock prices – suggesting less pressure on the Federal Reserve to support the market
The most immediate result would likely be a sharp sell-off into year-end, as investors locked-in capital gains ahead of likely tax rises.
Fossil fuel stocks have been anticipating this for some time. As we noted, ExxonMobil was been ejected from the Dow Jones Index in early September. It was the longest serving member of the Index, and the world’s most valuable company as recently as 2011.
We focus on the US 10-year rate, as this is the “risk-free” benchmark for global markets.
Bond investors can’t seem to make up their minds about interest rates. The 10-year rate closed marginally higher on Friday at 0.86%, but twice saw daily closes at 0.78%, whilst the MOVE volatility index rose 6% to 61.9.
Biden has not spoken much about interest rates, in sharp contrast to President Trump. This suggests Biden is likely to return to the previous arms-length relationship, in order to support financial market confidence and stability.
This hasn’t stopped some investors getting over-excited (in our view) about the likely impact of a Biden fiscal stimulus on inflation. But as the chart shows, this has happened before, with the rate temporarily moving above the 200-day moving average.
But then the reality of ageing populations, and their deflationary impact, returns to take rates lower again.
US Perennials 55+ lead population growth to 2030
Central banks have never really focused on demographics. They see it mainly in relation to increasing health care costs, and ignore its real importance. But their myopia is increasingly being challenged by reality as the charts confirm:
- The majority of US population growth over the next 10 years will be in the low-spending Perennials 55+ generation
- The Perennials are dominated by the relatively wealthy White population – which is now in actual decline
- They are a replacement economy, as they already own most of what they need – and like Millennials, are increasingly short of cash
- The growing Black/Hispanic communities are much younger, but earn very much less – $38k versus the Whites’ $51k
Another issue is that Perennials are very dependent on pension income, Social Security and Medicare.
State pension schemes were already under major pressure before the pandemic, with unfunded pension/healthcare costs equal to 11% of 50-state personal income. And Covid has already led to major losses in tax income at state and federal level.
The sooner the Fed turns its attention to these vital areas, the better it will be for the economy.