It can be interesting how some things simply drag on! I am referring of course to the reluctance of Donald Trump to concede the US election to Joe Biden until the 14th December, the fact that the coronavirus pandemic will extend well into 2021 – even with a vaccine – and, my favourite frustration, Brexit. The British people voted in the EU referendum 4 months before the Americans voted for Trump in 2016. They were promised a new deal with Europe and more control over trade, borders and finances. Fast forward to today and as I write, a deal has not been reached. A deal might be struck over the coming days but the headlines on Friday morning were not encouraging.
That is enough of past frustrations. Looking forward, it is not too long before there is a new President in the US and a new arrangement between the European Union and the United Kingdom. There should also be an end in sight to the pandemic. Sentiment will be volatile but there is a brighter – or at least more certain – future ahead. This is why equity indices rose to new all-time highs last week in the US. Hopefully we can repeat this comment for the UK market in 2021. There are also signs that analysts are starting to revise up their earnings forecasts for the coming year. For the S&P500 the number of upward revisions to 12-month forecasts of earnings per share have jumped in November.
The announcement of Janet Yellen as proposed US Treasury Secretary was also taken well by markets. There are few people with better economics and public policy credentials than her. She is seen as a dove but note that she was the Federal Reserve (Fed) Chairman when interest rates started to increase and presided over 5 hikes in the Fed Funds rate between 2015 and the end of her term in office in February 2018. More recently she has been vocal about the need for fiscal policy to take a leading role in economic recovery relative to monetary policy. My recollection is that Yellen was treated respectfully in appearances before Congress when she was at the Fed and her ability to back policy decisions with well thought out economic arguments should bode well for getting fiscal plans supported, even if Congress remains split. Few individuals have been both Fed chair and Treasury secretary – a testimony to the recognition of Yellen’s intellectual stature. I am sure she will also work well with the current Fed Chairman (her successor), Jerome Powell. Investors should take heart that there will be some serious policy making in the years ahead.
There does seem to be general agreement that the economic outlook for the next couple of years is encouraging. There is the potential for a huge amount of pent-up demand to be realised supported by the need to re-stock inventories in the business sector and by targeted fiscal spending. Of course, there are concerns that, at some point, Governments will need to row back on fiscal stimulus but, in my view, concerns about an imminent return to austerity are wide of the mark. Even in the UK, where Chancellor Sunak outlined the government’s spending plans last week, the cuts to spending were limited and there were promises of even more fiscal help as long as the economy needs it. Putting the fiscal house in order is for another day. And why not? Governments can borrow at nearly zero interest rates and central banks are still buying lots of government bonds to help keep those rates low. Debt repayments for the UK Government were actually lower in October 2020 than in October 2019.
As I write to you in December, I cannot believe how far away March 2020 feels. Back then, markets were in full on panic mode and losses were building rapidly. Fast forward nine months and we have a brighter economic future, the promise of widespread vaccinations and the choice of well-respected individuals for a new Biden cabinet in the US and this has all contributed to good market returns over the last four weeks. Earnings forecasts are being revised up and volatility is falling. This all looks encouraging for future growth prospects for 2021.