What will the United States be like under Biden?
Democratic candidate Joe Biden won Pennsylvania, which finally appears to have decided the outcome of the US presidential election. Now there are clear hopes that American foreign and trade policies will be more predictable, which means trade negotiations with China will be pursued in a more even-tempered tone and that the risk of an imminent trade war between the US and the European Union will effectively disappear.
On the domestic front, there is lingering uncertainty about what mandate the Biden administration will have, since the balance of power of the Senate will be determined by two run-off elections in Georgia early in January, with the Republicans having a slight advantage. In the upcoming negotiations about new federal fiscal stimulus Biden may be able to expand the size of the package, but he will likely be forced to give up his plans for large corporate tax hikes, which financial markets had worried about. With Biden in the White House instead of Donald Trump, British Prime Minister Boris Johnson will also be under increased pressure to quickly complete negotiations on a trade agreement with the EU.
The Trump campaign has just initiated a series of legal actions challenging the presidential election results in key states, including allegations of cheating and calls for recounts, but their chances of changing the outcome of the election look extremely small.
Stock markets reacted positively to Biden's victory − with its prospects for a more predictable foreign policy − and to the likelihood of a Republican-controlled Senate.
Vaccine announcement helps trigger stock market upturn and rotation
On November 9, US pharmaceutical giant Pfizer announced favourable results from a large study indicated that the company's COVID-19 vaccine is 90 per cent effective in preventing the disease, and adding that it may also be ready for use before the end of 2020. This is a very impressive effectiveness level, since expectations have been around 60-70 per cent, and it signals that the COVID-19 virus can be stopped − which is much-needed since the pandemic is continuing at undiminished strength. The announcement triggered a strong cyclical rally led by Europe and a major sectoral rotation as investors sold off shares of companies that have benefited during the pandemic and bought shares of companies that have been among the hardest-pressed. But after America's S&P 500 initially jumped by 4% on November 8, the market calmed down a bit and the index closed the day up by a modest 1.1%.
New quarterly issue of SEB's Nordic Outlook research report
After a surprisingly strong economic recovery in the third quarter of 2020, the second wave of the novel coronavirus is becoming significantly worse than expected. New restrictions will again lead to negative GDP growth in many countries during the fourth quarter, at the same time as stimulus measures are expanded. Sweden's GDP decline in 2020 will be limited to 3.1 per cent – half of what we projected in May. New restrictions will cause growth to level off during the next few quarters, and we have lowered our GDP growth forecast for 2021 to 2.7 per cent, from the previous 4.2 per cent. But this will create room for higher growth in 2022. Unemployment will peak next spring at 9.7 per cent (0.5 points higher than today). Unutilised crisis funds totalling more than SEK 100 billion can be used in the near term to help businesses and others. Meanwhile we expect the government's SEK 105 billion stimulus budget for 2021 to be expanded by SEK 50-70 billion. For more details about Nordic Outlook, November 2020 and to read the full report, click here.
Our market view
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.
Most companies have now reported their third quarter 2020 results. The general picture is that earnings have provided upside surprises, but strong quarterly reports have not been fully rewarded with rising share prices − a confirmation of our view that the upturn since stock markets bottomed out last spring implies that investors are already counting on positive performance ahead, as reflected by valuations. Yet because of better-than-expected earnings, combined with flat or slightly negative share price movements, valuations have recently fallen a bit. We do not regard today's valuation levels as alarmingly high, although they imply some limitations on potential returns.
Worrisome signals about the spread of COVID-19 and the risk of new lockdowns are probably the biggest threat at present. Because of the restrictions that have already been imposed, growth and earnings forecasts for this winter – which have been adjusted upward in recent months – may need to be lowered for the current quarter. As long as the spread of the virus is accelerating, new lockdowns will be a major source of concern. On the other hand, there are positive signals that we are approaching the date when COVID-19 vaccines can be launched.
Given the encouraging overall economic outlook we are sticking to our recommendation of an overweight in equities and other risk assets, despite short-term sources of concern.