Market Commentary: What the upcoming election could mean for the economy

16 October 2020

Watch Freddy Lim, StashAway Co-founder and Chief Investment Officer, and Philipp Muedder, Head of Financial Planning and Partnerships, discuss the latest global events and their impact on the markets.

In this episode,

  • Monetary policy: Repeated calls from the Fed urging more government spending [0:45]
  • Fiscal policy divide between Democrats and Republicans [3:16]
  • The potential impact a Biden or Trump win can have on the markets [6:46]
  • Lowering your exposure to sector-rotation risk [9:47]


00:01 | Philipp

Hello and welcome, everyone, to another weekly market commentary from StashAway. With us of course, our Chief Investment Officer, Freddy Lim. Hey Freddy!

00:09 | Freddy

Hi Phillipp! Good to see you again and everyone else.

00:13 | Philipp

It's good to be with everyone again. Before we get into the topics, I know we have quite a bit as we discussed earlier today. But if you like what you see, feel free to subscribe to our YouTube channel, also our podcast, In Your Best Interest, if you're interested to learn more. There's also links in the show notes right below this video. But Freddy, we do have quite a bit to get through today. You've been doing a lot of research into obviously different election outcomes and what that means for markets, and portfolios of customers. But before we get into it, it's kind of a nice flow to that topic anyways, is the monetary policy, right? We've been explaining over the last six, seven months you've always gone back to the money multiplier, right? What can the Federal Reserve do versus what the government has to do in terms of stimulus, right? And we touched a little bit on it last week when Jerome Powell, the Head of the Federal Reserve, also urged the government to come up with some more stimulus, right? Do you want to give the listeners a little bit of a background there?

01:29 | Freddy

Yes, to really understand why the central bank is repeatedly calling for more government spending, you've got to look at the velocity of money and remember back in March, during the worst rout of COVID-19, the Federal Reserve has reduced the required reserve ratio for deposit-taking institutions from 3% and 10% for small banks. They have dropped it to zero. So, essentially banks do not have required reserve requirements and they can lend at will, right? So, this was a clear effort to speed up the velocity of money because the Fed was stimulating; it was pumping and printing money in the system, they wanted to be more efficient. However, we have more and more data since then and we have continued to see a persistent decline in the velocity of money. In particular if we look at M1 money, which involves your credit card transactions, time deposits, and the more liquid portion of money in circulation. It relates most relevantly to payments and consumer activities, that multiplier has dropped from 5.5x back then to 3.7x. So, that just means that monetary policy is becoming less and less effective to the point that even the IMF, the International Monetary Fund, who traditionally has been the biggest defender of fiscal discipline, has joined in openly in the call for all governments to step up their spending. That is very unusual, and is related to the effectiveness of monetary policy.

03:16 | Philipp

Absolutely and I think this leads us directly to one of the issues that's been surrounding especially for the US itself, right? How do you come up with stimulus when you have an impasse, right? In the US, there's so much divide right now between the Republicans and the Democrats. So, when it comes to fiscal spending where do you see this going and are they going to come together before the election is done?

03:49 | Freddy

Well, the fiscal impasse is one of the four big items that caught the markets attention. It's very difficult to understand, there's so much news going on so I believe that we have a great table here that would summarise the key policy differences between the Republicans and the Democrats going into the election. And this is a very, very important table to know. And on the leftmost side of this table, you will see a column labeled fresh fiscal stimulus and it's not just about the presidency, it's also about the Democrat Party's common policies, right? So, on the top left side of this table, you will see that on the Biden Democrat side on fiscal stimulus, they tend to prefer larger size packages. They have passed, in the House, a $3.4 trillion package only to get it rejected at the Senate, which is dominated by the Republicans. So, there's a stalemate right now. And on the Republican side, they actually favour smaller packages but more targeted packages, like a piecemeal approach where, "Oh, the airline needs something. Ok, let's have a package just for airlines.", "Oh small businesses and community somewhere needed more, ok,  let's craft another package just for that." So, they are a lot more concerned about unlimited spending, and they want to be more targeted going forward. So, there's some substantial differences between the two parties. President Trump has already risked alienating his own party members by raising their offer from a very low point, $650 billion, he has raised it to $1.8 trillion in the latest offer. The Democrats have reduced from $3.4 trillion down to $2.2 trillion. They are still apart and there is still an impasse. It's been very difficult to bridge the great divide between the two parties on this right now.

05:44 | Philipp

And this obviously comes at a time when it's bad. There's political fighting and the problem is, the people are the ones that get hammered by it, right? By them not making any decision to move forward with any of these or coming to an agreement. And I think that's the problem when you have these very divided places where it's really 50/50, right? No one wants to give in one single bit to look like they're on something, right?

06:13 | Freddy

That's right. And the figure has shown, right? We have color coded this figure right here, market hostile being more red or redder and friendlier market policies being light blue to dark blue so users can use this table and read it in more detail. There are other things on taxes, antitrust measures of big tech firms, and policy towards China. I wouldn't repeat what's on the figure here but it is a very nice figure to look into.

06:46 | Philipp

Absolutely. And thank you for putting this up. I think it's a very good figure to take a look at for everyone that's interested in this. And one area that I do want to dial in a little bit Freddy is, the breakup risk of big tech firms, right? The antitrust report that came out last week, we touched it just a little bit last week, right? But I think you had some time to go over it and think about the long-term consequences for this depending on who wins the election this year. Anything that you want to add from last week?

07:22 | Freddy

Yeah, I mean, I would like to take a probabilistic approach to analysing the election outcome and what it means for markets. In principle, in the very long term they don't matter but when you look finer at the details within certain industries or segments of the economy, they do get impacted by policy changes. So, we do have to respect the election outcome, it's very bipolar in nature this time. So, maybe it's more complicated than before. But here, I have another figure. Thank you for giving me the opportunity to explain another table today. Here, I actually have a scenario analysis and it's not just about who wins the presidency. It's about whether after winning the presidency, how many chambers of Congress are won by the party, right? And at the moment, looking at the polls and the widening lead on the Democratic side, one can probably say that there is a risk. The chance is there, nobody knows how high that is but there's a good chance that the Democrats may actually sweep both chambers of the US Congress and that's represented at the top row of this table. A Biden win followed by Democrats winning both chambers, and you can see the color code on the stimulus column. It's dark blue because that means there's no stalemate. Both chambers will be able to quickly get a majority and pass a larger fiscal stimulus package. And I think that's positive for the general markets. It will be welcome. But once you look at the other things like we flagged a big red on antitrust breakup risk for Big Tech. As you know, the Democrats have been leading House panel subcommittees, studying the issues of antitrust on Big Tech firm practices and they have written the 449 page report, a scathing report that really sort of highlighted a lot of anti-competitive practices of Big Tech firms and they are calling for a breakup of Big Tech firms to address antitrust issues. And this could very much go in the extreme for the likes of Facebook, Amazon, and even Apple. And given that the huge market share of these firms, it is a big sort of risk scenario for markets to be mindful of,

09:47 | Philipp

And that's what I wanted to ask you right like so, what can investors do to protect themselves from this? Because like you said, you know these companies front and center when it comes to investments, right?

10:01 | Freddy

Precisely, I mean investors have to really keep in mind, we know that tech has been doing so well during the whole pandemic situation but there could very well be a reverse of fortune if an antitrust risk starts popping up because of the election outcome. So, that's another risk factor like, what if a speedy vaccine development surprises and is actually going to hit the market sooner than expected. Then suddenly you have a sector rotation where fund flows are going to come out from tech into the beaten down sectors of the economies. So, that is a very big risk and we call that sector-rotation risk that people should be mindful of. And the only real solution is diversification. Do not make your portfolio concentrated in any sense, do not concentrate them in tech because they have done well this year. You should always maintain a very diversified approach to your investing.

10:58 | Philipp

Yeah absolutely. Thank you Freddy, for this. This was really elaborate and I think the people will very much like to refer to those charts of yours, those figures, because I think that's very self explanatory. So, thank you for that. For everyone, I know we usually do quite a lot of user questions from the week before, we do have a few of them, we'll actually get to them next week because today there was already quite a lot of content, so we want to keep these videos precise. So, for everyone who asked questions last time, don't worry we have them saved. So, Freddy and myself will catch them on next week's show. And to wrap it up, we do have a couple of upcoming webinars soon. In Singapore, we actually have a webinar for people who are in HR positions or people who own companies or have some say in their company. It's called Building a Financial Wellness Program for your Company and so in that seminar, you'll learn a lot about different savings programs for employees. Also, what you can do on the education side for them when it comes to personal finances. So, if you're interested in this, it's on the 20 October next week from 5pm to 6.30 pm and in Malaysia, we have How to Invest (The Right Way) using ETFs, that's on 21 October from 6pm to 7 pm. Again, both of those links to sign up are in the show notes below as well as on our website respectively for Singapore and Malaysia. With that being said, thank you Freddy for being here and we will all see you again next week. Bye-bye.

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