Global equities resumed their rally last week, gaining 2% or so in local currency terms. This brings the increase so far in November to as much as 12% and leaves markets up a remarkable 11% year-to-date. Even though a return towards economic normality is now clearly in sight next year, it is still quite hard to believe markets have regained their Covid-related losses and more even while the virus is still on the rampage.
The advice contained in the old market adage ‘Don’t fight the Fed’ appears more sage than ever. The rebound over the spring and the summer was in good part down to the unprecedented size and speed of the Fed’s actions, along with a massive fiscal support program. The Fed, however, has now largely done its bit and is largely out of ammunition, while governments are also starting to scale back their largesse.
‘Don’t fight the Vac’ is the slogan best encapsulating both the market’s latest gains and the potential for further increases down the road. Operation Warp Speed was launched by Trump to spearhead the move to find a vaccine in the US and is a fitting description of the global effort given the speed at which new and seemingly highly effective vaccines have been developed.
Vaccines should start to be rolled out in December with the UK leading the way and it is quite possible that over half the population in the major economies could be vaccinated by mid next year. If so, this should herald the end of most social distancing restrictions, a release of pent-up demand by homebound consumers and a strong economic recovery – all music to the market’s ears.
Still, not all of the recent gains can be put down to vaccines. The prospect of a much more stable and collaborative government in the US is also helping. The news last week that Biden has selected the highly respected Janet Yellen, who served as Chair of the Fed before Jerome Powell, to be Secretary of the Treasury went down well. As no doubt did signs that Trump is beginning to accept the inevitable and will be exiting, if none too gracefully, the White House in January.
Back here in the UK, Rishi Sunak did his best to dent any emerging optimism with his pronouncement that ‘Our economic emergency has only just begun’. It is certainly true that the UK economic numbers look dire with the economy forecast to shrink 11.3% this year – the largest decline in 300 years – and the budget deficit expected to hit close to £400bn or 20% of GDP. The UK has not only suffered a larger economic cost than most other countries but also a higher human cost with one of the highest Covid-related mortality rates.
While Sunak was at pains to point out there will be a price to pay down the road, his focus was just on government spending. And while there were areas of austerity – most notably in foreign aid, the pay freeze for much of the public sector and no extension to the rise in universal credit beyond March – spending on the NHS, education and defence was all increased. Tax increases will also be coming but just not quite yet.
After four and a half years of torture – well certainly tortuous debate and negotiation – Brexit is almost finally upon us. As hard to believe as the market’s miraculous recovery, is the fact with all of a month to go, it is still unclear whether we leave with a Deal or not. Most likely we get some kind of deal and that seems to be the assumption of the markets, with the pound inching steadily higher over the last couple of months. This week has been billed as another ‘make or break’ week and this time maybe it really will be.
Rupert Thompson
Chief Investment Officer