Stronger October after weak September
Risk appetite seems to have rebounded somewhat after temporary weakness in September, but autumn is often a fickle period in the markets. The tech-heavy Nasdaq index in the United States, like the Swedish stock market, has reached several consecutive all-time highs in recent days. After many twists and turns, a new American fiscal stimulus package is again being negotiated. Ahead of the third quarter corporate report season, which is just beginning, the global earnings revision ratio (the percentage of companies for which analysts have revised their forecasts upward compared to downward) is climbing. As measured by the MSCI AC World Index in US dollars, global equities have gained more than 3% in the past week.
News headlines in Europe are indicating a rebound in the spread of COVID-19, but the stock market does not appear to be reacting strongly, since the focus is on less dramatic responses than last spring: face mask requirements, limits on the size of gatherings, recommendations to work from home and various restrictions on bars and restaurants. Negative news on vaccine development is another cloud in the sky.
To stimulate or not to stimulate – and a weaker US dollar
Right after leaving the hospital where he was treated for COVID-19 over a weekend, US President Donald Trump put an end to discussions between Republicans and Democrats on a new round of federal relief and stimulus measures, saying he will instead aim for enactment of a stimulus package of his own after the November 3 election. His change of position came only hours after Federal Reserve Chairman Jerome Powell warned that too little relief may lead to unnecessary problems and that the recovery may be both faster and stronger if fiscal (budget) and monetary (central bank) policies work side by side. Since then, Trump has changed his mind (again) and now says that he would like an even larger relief package than the Democrats had proposed in recent negotiations.
Regardless of who wins the presidential election, more US stimulus measures are likely. There are many indications that the end result will be a package equivalent to about 10% of 2019 GDP. This will result in continued large federal budget deficits and, we believe, also further weakening of the dollar. Provided that there is a clear election outcome – no uncertainty about who won – the dollar should continue its relatively rapid decline after the election. It would not be impossible to see the EUR/USD exchange rate rise to 1.25 and the USD/SEK rate fall towards 8.
Better growth outlook with Biden?
The chaotic September 29 election debate and Trump's coronavirus infection have strengthened Democratic presidential candidate Joe Biden's chances in voter surveys. Stop-and-go talks on a new federal stimulus package and signs that the US economic recovery has lost momentum are meanwhile calling attention to the differences in the election platforms of the two candidates.
For Trump, the issues that appear likely to remain in focus are China, protectionism, trade and immigration. Plans for additional tax cuts are vague. Looking at Biden, a combination of green infrastructure spending and increased social spending looks set to be larger in size than his proposed tax hikes on businesses and high income earners, suggesting an even more expansionary overall fiscal policy.
Depending on the design of any stimulus packages, the growth outlook for the next few years may be revised upward under a President Biden, especially if the Democrats also gain control of the US Senate. If Trump wins, he will probably be forced to negotiate with a Democratic-controlled House of Representatives. Although Biden has widened his lead over Trump in the latest public opinion surveys, we believe that the election outcome is still uncertain, both in terms of the winner and when the results will be declared final.
For a more detailed analysis of the election and its possible outcomes by SEB's US economist Elisabet Kopelman, click here.
Continued strong momentum in the Swedish housing market
According to Mäklarstatistik's latest report from Swedish estate agents, the prices of both tenant-owned housing units (mainly flats) and one-family homes rose by an average of 2% in September. This means that one-family home prices climbed by about 10% in one year, while tenant-owned units rose by 5%. Yet prices of second homes were up 11% year-on-year, while 12% more second homes were sold in January-September 2020 than in the year-earlier period. The October SEB Housing Price Indicator also rose: 65% of responding household expected home prices to increase while 7% believe they will fall.
Reflections: Remote work trend will lead to rising share prices
SEB's Chief Strategist Johan Javeus has taken a further look at the trend towards more people working from home: how it has the potential to create a global labour market that will squeeze wages in Western countries, while benefiting companies and investors. Read more here.
Our market view
The market is focusing more and more on the US elections. Ahead of elections there is often an increase in uncertainty about future policies, which usually leads to greater stock market fluctuations. This time around, many analysts are pointing out that both main US presidential candidates plan to pursue an expansionary economic policy. This should help sustain growth as well as share prices. However, the policy mix advocated by their respective political parties diverges in a number of fields. Whereas Trump and the Republicans are favoured by the market in terms of taxation policy, a Biden/Democratic victory is likely to pave the way for larger fiscal stimulus packages.
But most observers, including us, have made the overall assessment that a Biden victory would be a bit more positive for markets – an outcome that has begun to appear more likely in recent days. This is probably one of the reasons why the stock market situation has stabilised and improved a bit, despite the uncertainty created by the effects of new coronavirus outbreaks, a levelling out of economic growth statistics and the ongoing Brexit negotiations on a trade agreement between the United Kingdom and the European Union, among other events. Although the US presidential race may trigger short-term volatility, we expect growth, stimulus packages and continued low interest rates and bond yields to be more important in determining stock market performance in the next few quarters, and these factors remain relatively encouraging.
Equity valuations are high from a historical perspective, making the market more sensitive to negative news. But there are good arguments for accepting higher valuations, especially low interest rates and yields along with major stimulus packages, which suggest continued good growth. In the short term, this will require that corporate reports for the third quarter of 2020 at least turn out to be in line with expectations. If corporate executives signal a gradual improvement in demand, that would be a clear sign of strength. Worrisome signals about the spread of COVID-19 and the risk of new lockdowns are probably the biggest threat at present.
We are sticking to our recommendation of an overweight in equities and other risk assets, such as corporate bonds in the high yield segment.