Biden Presidency: Investment Outlook
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BMO Capital Markets hosted a client call on Monday, November 9 on the election of Joe Biden to the presidency of the United States.
The call was moderated by BMO Capital Markets Chief Investment Strategist Brian Belski, featured expert commentary from Margaret Kerins, Managing Director and Head of FICC Macro Strategy, and Michael Gregory, Deputy Chief Economist and Head of U.S. Economics.
Listen to the full conversation here, or read the content below that describes what is in the podcast.
Holding to Economic Forecasts
Taking into consideration a Biden presidency and an as-yet uncertain shape for the U.S. Congress, BMO Capital Markets Deputy Chief Economist Michael Gregory said he was holding to the economic forecasts originally made by his team for 4 percent average growth for 2021, following a 3½ percent average decline.
Gregory noted that, while the Senate count is currently 48 for the Democrats (including two Independents) and 50 for the Republicans, including races for the two remaining seats in Georgia that are going to a runoff vote in January, which will determine which way the balance of power leans.
“We're not quite sure yet exactly what is the balance of power in the Senate,” he said, “which is critically important for assessing the economic and policy implications of a Biden presidency, at least in the very near term.”
Fiscal stimulus
The most important issue currently is the type of fiscal stimulus package Congress is able to put together in the near term. Senate Majority Leader Mitch McConnell has said that passing a fiscal stimulus package is the first order of business, but there’s a wide gulf between what Democrats are asking for, at $2.2 trillion, and the $500 billion that the GOP were pushing for. A stronger-than-anticipated employment report last week suggests it might be closer to the smaller side.
“Our working assumption is we're going to get a package that's running a little bit closer to a trillion, or up to a trillion,” Gregory said, “for the simple reason that the second wave of COVID-19 is unfolding before our eyes, and this will create a hefty headwind for the economy. We do think that Congress will step up.”
He expects three major elements in the fiscal stimulus package. First, the pandemic unemployment assistance and the pandemic emergency unemployment compensation programs that expire at the end of December, which 13 million Americans are still utilizing and will need to continue; second, the Paycheck Protection Program (PPP), which is already closed but expected to re-open with more stringent rules, to address the reports of fraudulent activity that have come in; and finally, more funding for state and local jurisdictions currently battling a new wave of COVID-19.
Vaccine news
While the news of a fast-progressing Pfizer vaccine was welcomed, Gregory explained that it’s still going to take some time for the company to go from an effective vaccine to one that is widely available, suggesting a rather bleak fall and winter season that underscores the need for a substantive fiscal stimulus package.
“Another avenue I think that may help the economy a bit here – in a new administration, we'll get a new treasury secretary, and a potential for less stringent rules being applied to the capital underpinning the Fed’s various lending facilities,” Gregory said.
Canada Prospects
A Biden presidency is mostly good news for Canada, especially with respect to what will surely be a less rancorous trade environment, but the new shape of the U.S. government will also mean that permissions will be pulled on the Keystone XL pipeline, which is bad news for the Canadian energy sector.
Tightening Credit Spreads
BMO Capital Markets' Margaret Kerins noted that, with the election hurdle cleared, as well as news of substantial progress toward a COVID vaccine by Pfizer Inc. and positive economic news with U.S. job numbers on Friday, the market was responding with momentum.
“As we are watching the market this morning, we are seeing 10-year yields backing up to the pre-election results level, where we hit intraday last week at 95.5, and we are basically there again,” said Kerins. “The bearish underpinnings are there, and we do continue to expect a move toward 1%, which clearly isn't as big of a deal now that we're back to 95.5, versus, you know, when we were in the 70s last week.”
She pointed to U.S. jobs figures released on Friday which showed the economy has recovered 12 million of the 22 million jobs that were lost to the pandemic, with the unemployment rate falling to 6.9 percent over the past six months.
Kerins said credit spreads were responding by narrowing to new post-pandemic levels, predicting that would continue into the new year, as the economy recovers and investors reach for yield in a very accommodative Fed environment.
“So those three things, clearing the election hurdle, great progress on the vaccine hurdle, and continuation of positive news on the economic side. It's all supported on the market momentum here,” she said.
Still in a Bull Market
With stock markets soaring on Monday amid news that Pfizer may be close to having an effective COVID-19 vaccine widely available, BMO Capital Markets Chief Investment Strategist Brian Belski said he maintained his bull market thesis for U.S. and Canadian markets, but advised investors to proceed with caution, especially with the balance of power still in play in the U.S. Senate.
“Today obviously is a huge, momentum-type move, which most of 2020 has been, quite frankly … 2020 has been a year of unprecedented behaviour, in terms of fundamentals, the economy, stocks in general, and we don’t think that is going to end any time soon,” he said. “And given days like this, you don’t want to base your investment strategy on a day like today.”
Belski advised clients not to make investment decisions based on the winners and losers in markets on Monday, cautioning them instead to take a balanced approach that looks at the three engines behind company growth: structural, cyclical and secular.
“And so whether or not you're being a growth or value investor, I don't think you have to make a binary type decision; so, too, in terms of cyclicals and/or small cap versus large cap.”
Belski agreed with his co-panelists that markets are “sniffing out” a Goldilocks scenario and he said he still believes in his 3650 target on the S&P for the year, and 3850 for the next 12 months. For Canada, his target remains 18,500 on the TSX and 18,700 for the next 12 months.
“We continue to believe that North American markets, in general, are the best positioned equity markets in the world in terms of assets, meaning the best companies in the world, and we still believe that the big bull market is alive and driven principally in the U.S. by technology, communication services, consumer discretionary, very select consumer staples retailers, select healthcare, which is what you're seeing here today, and then very select big money centre banks that have scalable assets.”
Brian is the Chief Investment Strategist and leader of the Investment Strategy Group, provides strategic investment and portfolio management advice to both institut…(..)
View Full Profile >Michael Gregory, CFA
Deputy Chief Economist & Managing Director
800-613-0205
Michael is part of the team responsible for forecasting and analyzing the North American economy and financial markets. He has spent his career working in either ec…(..)
View Full Profile >Margaret is a Managing Director and Head of FICC Macro Strategy for BMO Capital Markets and a member of the FICC Management Committee. She has responsibility for th…(..)
View Full Profile >BMO Capital Markets hosted a client call on Monday, November 9 on the election of Joe Biden to the presidency of the United States.
The call was moderated by BMO Capital Markets Chief Investment Strategist Brian Belski, featured expert commentary from Margaret Kerins, Managing Director and Head of FICC Macro Strategy, and Michael Gregory, Deputy Chief Economist and Head of U.S. Economics.
Listen to the full conversation here, or read the content below that describes what is in the podcast.
Holding to Economic Forecasts
Taking into consideration a Biden presidency and an as-yet uncertain shape for the U.S. Congress, BMO Capital Markets Deputy Chief Economist Michael Gregory said he was holding to the economic forecasts originally made by his team for 4 percent average growth for 2021, following a 3½ percent average decline.
Gregory noted that, while the Senate count is currently 48 for the Democrats (including two Independents) and 50 for the Republicans, including races for the two remaining seats in Georgia that are going to a runoff vote in January, which will determine which way the balance of power leans.
“We're not quite sure yet exactly what is the balance of power in the Senate,” he said, “which is critically important for assessing the economic and policy implications of a Biden presidency, at least in the very near term.”
Fiscal stimulus
The most important issue currently is the type of fiscal stimulus package Congress is able to put together in the near term. Senate Majority Leader Mitch McConnell has said that passing a fiscal stimulus package is the first order of business, but there’s a wide gulf between what Democrats are asking for, at $2.2 trillion, and the $500 billion that the GOP were pushing for. A stronger-than-anticipated employment report last week suggests it might be closer to the smaller side.
“Our working assumption is we're going to get a package that's running a little bit closer to a trillion, or up to a trillion,” Gregory said, “for the simple reason that the second wave of COVID-19 is unfolding before our eyes, and this will create a hefty headwind for the economy. We do think that Congress will step up.”
He expects three major elements in the fiscal stimulus package. First, the pandemic unemployment assistance and the pandemic emergency unemployment compensation programs that expire at the end of December, which 13 million Americans are still utilizing and will need to continue; second, the Paycheck Protection Program (PPP), which is already closed but expected to re-open with more stringent rules, to address the reports of fraudulent activity that have come in; and finally, more funding for state and local jurisdictions currently battling a new wave of COVID-19.
Vaccine news
While the news of a fast-progressing Pfizer vaccine was welcomed, Gregory explained that it’s still going to take some time for the company to go from an effective vaccine to one that is widely available, suggesting a rather bleak fall and winter season that underscores the need for a substantive fiscal stimulus package.
“Another avenue I think that may help the economy a bit here – in a new administration, we'll get a new treasury secretary, and a potential for less stringent rules being applied to the capital underpinning the Fed’s various lending facilities,” Gregory said.
Canada Prospects
A Biden presidency is mostly good news for Canada, especially with respect to what will surely be a less rancorous trade environment, but the new shape of the U.S. government will also mean that permissions will be pulled on the Keystone XL pipeline, which is bad news for the Canadian energy sector.
Tightening Credit Spreads
BMO Capital Markets' Margaret Kerins noted that, with the election hurdle cleared, as well as news of substantial progress toward a COVID vaccine by Pfizer Inc. and positive economic news with U.S. job numbers on Friday, the market was responding with momentum.
“As we are watching the market this morning, we are seeing 10-year yields backing up to the pre-election results level, where we hit intraday last week at 95.5, and we are basically there again,” said Kerins. “The bearish underpinnings are there, and we do continue to expect a move toward 1%, which clearly isn't as big of a deal now that we're back to 95.5, versus, you know, when we were in the 70s last week.”
She pointed to U.S. jobs figures released on Friday which showed the economy has recovered 12 million of the 22 million jobs that were lost to the pandemic, with the unemployment rate falling to 6.9 percent over the past six months.
Kerins said credit spreads were responding by narrowing to new post-pandemic levels, predicting that would continue into the new year, as the economy recovers and investors reach for yield in a very accommodative Fed environment.
“So those three things, clearing the election hurdle, great progress on the vaccine hurdle, and continuation of positive news on the economic side. It's all supported on the market momentum here,” she said.
Still in a Bull Market
With stock markets soaring on Monday amid news that Pfizer may be close to having an effective COVID-19 vaccine widely available, BMO Capital Markets Chief Investment Strategist Brian Belski said he maintained his bull market thesis for U.S. and Canadian markets, but advised investors to proceed with caution, especially with the balance of power still in play in the U.S. Senate.
“Today obviously is a huge, momentum-type move, which most of 2020 has been, quite frankly … 2020 has been a year of unprecedented behaviour, in terms of fundamentals, the economy, stocks in general, and we don’t think that is going to end any time soon,” he said. “And given days like this, you don’t want to base your investment strategy on a day like today.”
Belski advised clients not to make investment decisions based on the winners and losers in markets on Monday, cautioning them instead to take a balanced approach that looks at the three engines behind company growth: structural, cyclical and secular.
“And so whether or not you're being a growth or value investor, I don't think you have to make a binary type decision; so, too, in terms of cyclicals and/or small cap versus large cap.”
Belski agreed with his co-panelists that markets are “sniffing out” a Goldilocks scenario and he said he still believes in his 3650 target on the S&P for the year, and 3850 for the next 12 months. For Canada, his target remains 18,500 on the TSX and 18,700 for the next 12 months.
“We continue to believe that North American markets, in general, are the best positioned equity markets in the world in terms of assets, meaning the best companies in the world, and we still believe that the big bull market is alive and driven principally in the U.S. by technology, communication services, consumer discretionary, very select consumer staples retailers, select healthcare, which is what you're seeing here today, and then very select big money centre banks that have scalable assets.”
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