It is just 3 weeks until the US Elections. Despite the devastating polls for the former “stock market darling“ Donald Trump, the markets continued to grow. The markets seem to be gaining acceptance that even though an election of Joe Biden might mean a retreat from previous deregulations and tax cuts, but may at the same time lead to greater stability of the world economy through a “Twitter-free” policy, while investment programs such as in the areas of infrastructure and renewable energies could offer attractive growth potential.
But even if these topics are currently dominating the headlines, they are irrelevant for the successful long-term thinking investor. Relevant are the profit and sales dynamics of companies and their credit conditions (with the latter being guaranteed by the central banks) alongside with a proper assessment of the existing and future risks.
These could result from geopolitical tensions among other things. For example, will the Chinese use the current vacuum of the US politics and the surprising resignation of the Japanese prime minister to enforce their claims on Taiwan? And how would the West react to any kind of intervention? But even if a major conflict arises, the market impacts are not unambiguous. Short term market slumps could be compensated by the stabilization of oil exporting countries when oil and commodity prices rise at the same time while the Chinese government might “trade” political decisions against economic concessions by further opening their markets. A cocktail, which the West, depending largely on exports, has never rejected.
Overall, investor’s expectation on long term equity yields must be discounted to their long-term average of around 6%; a phase like the last 10 years, in which US investors in particular achieved more than twice the long-term average, will not be seen anymore. This is all the more true, as US investors represent the largest group of equity investors and are already highly invested which will make new purchases less probable.
Tailwinds for the markets could be generated by demographic developments as the strong growing group of 35-49-year-olds have to invest in their retirement provisions. And Also, numerous companies have built up massive liquidity surpluses during the crisis through expense cuts and bond emissions (the companies in the S&P dispose of 1.8 trillion US$ ample funds). These funds could flow into dividend payments and equity buybacks, as capital investments will only be resumed when getting back to capacity limits. All in all, these examples represent, among other things, good perspectives for the stock markets also in 2021.