- June 30, 2020
- Posted by: Kharis Global
- Category: Uncategorized
What are the narratives of our time?
Economist Robert Shiller once said that the stories investors tell themselves drive their investment thesis, which drives their reason for putting money to work in an economy. By that standard, economies and markets are driven by “narratives”.
Right now, investors are still coping with the coronavirus and lockdowns. Much of the country is still at least partially closed. There’s no tennis. There’s no baseball. There’s no night life in America’s biggest cities. This is a nation of wall-flowers who can’t throw overhand.
The story of life in lockdown is everything right now. But we are leaving lockdowns, so Wall Street has priced that in. Markets are celebrating and have been now for weeks.
For Mark Haefele, the CIO for UBS Global Wealth Management, there are three prevailing narratives at the moment: the “Fed” story, the “second wave” story, and the “U.S. election” story.
The “Fed” Narrative
Jerome Powell is no longer the Wall Street “wet[+]© 2019 BLOOMBERG FINANCE LP
“The Fed story has never been stated this clearly,” says Haefele.
At the June Fed press conference, Chairman Jerome Powell said that interest rates will remain near zero for at least another 12 months. “We’re not even thinking about thinking about raising rates,” he famously said. “What we’re thinking about is providing support for this economy.”
The Fed intends to put financial conditions back to where they were before the coronavirus crisis, with a focus on getting the job market back to where it was before, and growth of around 2%.
The Fed is supportive of securities. It’s even buying some ETFs. The Fed is telling Wall Street that if the market falls too much, they are there to buy on the lows. This is supportive of most asset classes, but mainly growth stocks.
The “Second Wave” Narrative
Many people in the market now look at these narratives surrounding the coronavirus as politically motivated narratives.
The coronavirus response has been a disaster since the get-go. Between the CDC sending out faulty and possibly even contaminated test kits, to the state of New York allowing for sick nursing home patients stricken with Covid-19 to return to their nursing homes, no one has gotten this exactly right.
In early May, stories in the political press about lockdowns being lifted would lead to unimaginable deaths proved to be false prophecies.
The coronavirus wave has yet to go flat in Russia,[+]ASSOCIATED PRESS
Cases are rising, but hospitals are not saturated with Covid-19 patients. Death tolls are not suddenly skyrocketing as more states open for business. This is a headwind for the market.
Haefele notes in a 15-pager to clients dated June 18 that these recent upticks are small in relation to the capacity of health systems, and that various governments, including those abroad, have stated that they are not going back to lockdowns.
“We have not seen any evidence of a negative consumer response to second-wave fears,” writes Haefele.
Plus, progress on vaccines and therapeutics continues. As such, while second-wave fears could add to volatility, this is one narrative that will have to wait until next year. That’s when the real second wave is possible.
Worth noting, the first SARS never came back in any meaningful fashion after its 8 month debut between November 2002 and July 2003. If this SARS is like the first SARS, maybe we all get lucky. If it returns with a vengeance in the winter in a second wave, then we can also assume third and fourth waves and — perhaps — learn to live with the coronavirus.
Markets are forever hopeful that either of those two outcomes become the case. We won’t know until 2021, no matter what the op-ed experts keep writing. The coronavirus isn’t reading it. Neither is much of the investor class.
The “Trump Election” Narrative
This November’s presidential election has yet to become a significant story for markets, but it will be soon enough.
Expect an unusual election season. Will there even be a Democratic National Convention that calls Joe Biden to the podium as the man they’ve chosen to beat incumbent president Donald Trump? Will there be debates?
In the meantime, we are living in the prelude. Second waves are part of the political narrative that will lead up to the election as a second wave is preferable to ex-VEEP Biden as it leads to the perception that Trump has failed to contain.
Trump’s surprise victory in 2016 triggered the so-called “Trump trade” across financial markets. Risk assets rallied, government bonds fell, and the U.S. dollar strengthened. Taxes were cut. Regulations were loosened. It became cheaper to do business in the U.S. And then came tariffs on China goods, adding another negative to doing business there. The economy roared.
Looking forward, the election has the potential to add volatility to markets if investors tell themselves a “fear” story, says Haefele: a rollback of tax cuts and regulations.
Then again, a Trump win could mean a tougher trade war; more tariffs on goods coming in from China. The market may have learned to adjust to this, and so have companies.
The Trump vs Biden outcome will also depend on who keeps the House and Senate.
A Trump win, but a Democratically controlled House and Senate almost immediately leads to his impeachment again and possible indictment if they have the numbers in the Senate this time. Maybe some Republicans would jump ship. Vice President Mike Pence because President (not Biden).
Democratic presidential candidate and former Vice[+]ASSOCIATED PRESS
A Biden win with a Republican House and Senate would also lead to revenge impeachment, possibly for Ukraine, possibly for China, possibly for his role in allowing for the spying on Trump campaign officials. Who knows? Impeachment charges can be literally anything.
For UBS, if the Democrats gain control of the purse strings, then increasing the corporate tax rate from 21% to 28% would reduce S&P 500 earnings per share by about 5%.
A Biden administration would try to reallocate these funds into spending on climate change initiatives, healthcare insurance subsidies, and infrastructure, providing he did not need Republican approval. Biden is a likely headwind for traditional energy and financial stocks.
One thing is for sure, as we emerge from the Covid-19 shock, market developments will become more complex in the months ahead.
In the next few weeks, the easy part of a post Covid-19 recovery will be over and by then credit and equity will be far more expensive, especially growth and tech stocks.
“We expect the overshoot in equities to continue driven by the very aggressive monetary policy easing of central banks, fiscal expansions including a second package in the United States and the continued re-opening of the global economy with some temporary setbacks,” says Sebastien Galy, macro strategist for Nordea Asset Management.
One way to position for a Biden win? Consider Climate Themed Mutual Funds that typically load up on second tier growth stocks, says Galy.
An additional theme is the re-emergence of the Chinese economy. This should spread to the rest of Asia, making the big picture ETFs in countries like Vietnam and Thailand good securities to own.
“We are in the last phase of the post Covid-19 recovery offering significant opportunities in the next two months,” says Galy. “Beyond this, the environment is likely to become more complex.”