A Blue Wave Will Require Investors To Re-Evaluate Their Assumptions for 2021

North American markets today, Wednesday, appear set to open mixed as the S&P 500 and the NASDAQ are firmly in the red at time of writing while the DOW is in the green. That could change as the market digests the final results and implications of the Senate run-off races in Georgia. Democratic candidate Raphael Warnock has beaten Republican incumbent Kelly Loeffler for one of the two seats at stake while Democrat Jon Ossoff is leading incumbent Republican David Perdue for the other seat. The final result of that contest will be known late in the morning or early in the afternoon but with 98% of the votes counted Ossoff is claiming victory.

If Ossoff does win the second seat the Democrats will have a majority in the Senate. These results will bring at least some clarity to the legislative agenda, suggests Jay Nash, Senior Vice President at National Bank Financial in London. The Democratic sweep would mean that the United States enters the next 2 years with a Democratic majority in both the house and the Senate. “This would allow the Biden government to move forward on much more of their agenda and will require investors to re-evaluate their assumptions for 2021,” Nash says. “One could suggest that (this) outcome would favour companies focused on environmental progress and may be more of a problem for traditional energy producers.”

If Ossoff does win, the issue of Senate control has now been resolved but other issues require solutions within the short-term. Heading the list is the almost Kafkaesque two-way tug between the good news about vaccines and vaccinations with workers piling loads of vaccines for shipment, and the very disturbing reports of deaths in most countries. And we are nervously awaiting news of the spikes due to Christmas travelling. Whether those spikes cause governments to increase lockdowns with the resulting economic implications remains to be seen. Records of deaths and hospitalizations are being constantly shattered.

Also on the list is another dimension in the dispute with China. Yesterday proved once again the volatility of investing in China shares which had been under pressure due to the New York Stock Exchange decision to delist three telecommunications companies. As well, that decision appears to have eroded share prices in otherwise unrelated Chinese companies such as JD.com.

Then came the news that the NYSE had reversed its decision to delist these companies. That was a shock reversal of the first decision and increased confusion over a U. S. crackdown on firms suspected of links to China’s military, according to a Reuters analysis.

With the seemingly good news, shares in the three companies rose. China Mobile Ltd., for example, finished at $29.35, up $2.49 on the day

However, late yesterday afternoon a Bloomberg report said that the NYSE was revisiting the matter again and could revert to the original decision to delist the companies. If the report is correct, the impact will play out today.

Longer range, another issue overhanging the market is rock bottom interest rates, debt levels and the relationship between the two. Clearly, a large driver of the market is the continued low interest rates but lurking in the background is the question of huge government debts and they must be taken into account. National debts were already high, but government programs created to deal with COVID 19 have driven them much higher. The United States national debt stands at $27.758 trillion at time of writing and will likely hit $28 trillion the near future. (The total U.S. debt, taking in all levels of government is much higher.)

While individual and even most company debt has been reduced or refinanced at incredibly low interest rates, government debt has ballooned and is what most people would be concerned about, suggests Gavin Graham, United Kingdom-based financial analyst and media commentator. “In other words, how are they going to repay it, and will that involve either higher taxes and fees or higher inflation or some combination of the two,” he asks. “This is what will hit people directly.”

The good news, in a sense, Graham says is that the enormous amounts borrowed by governments to support taxpayers and businesses during the coronavirus pandemic in 2020 is also at low interest rates meaning that the costs of the government debt are quite low. That being the case, it appears unlikely that governments will raise interest rates in the short-or-medium terms.

Generally, since many individuals have lived in lockdown conditions and have been unable to travel, attend sports and entertainment or spend money on non-essential goods, their savings have risen sharply to above 15% of income, up from below 6% Graham says.

That, combined with low interest rates means that the cost of housing as a percentage of income has fallen so that consumers are in a better position on debt than government.

Much the same applies to companies that have used the low rates to lock in borrowing costs.

Disclosure: I do not own any shares in any company mentioned in this column.