The news continues to be dominated by COVID with areas of the country being moved to Tier 2 or Tier 3 regulations. Anxiety levels increase as do infection rates and, sadly, hospital admissions. It is all too easy to get immersed in the narrative and all will be justifiably concerned for family, friends and loved ones.
For the politicians, getting the balance right between public health and the health of the economy was always going to be a thankless and awful balance to strike. There are too many uncertainties, too many unknowns, for any one argument or approach to be categorically right or wrong.
It should be an awful backdrop for investments, shouldn’t it? Add in the US Election and the ‘deal or no deal’ Brexit and that view is endorsed further. Surely the one thing everyone was certain about was that markets hate uncertainty?
The key, we feel, is what type of uncertainty and when will it pass. The US Election and Brexit deadline day are a good example. Come 1st January, less than 10 weeks away, markets will know who is in the White House and whether we have a free trade deal with Europe.
There may be a preference for one outcome over the other in the US election but not perhaps enough to adjust a long-term asset allocation in a portfolio. The Brexit outcome will probably have a bigger impact on sterling than equity markets and so no-deal could see the FTSE 100 rise as sterling falls.
The COVID uncertainty does not have a defined end date and might reasonably therefore have a more adverse impact on markets. Of course, it already has done and sectors that are most vulnerable such as travel, leisure and high street retail continue to bear the scars. It is too early to pick recovery candidates from the debris so the less-impacted stocks will in all likelihood continue to flourish in relative terms.
But the uncertainty is not all one-way traffic. There are increasingly encouraging signs of a vaccine next year. It is unlikely to be a silver bullet that protects everyone at all times but one can be optimistic that it will help life adapt to the ‘new normal’. Better, more effective treatment is already making a difference.
There are also (near) certainties that are positive for markets. From an investment perspective the Fed in the US has been, and still is, the major catalyst for risk appetite. As often mentioned, the stimulus package in mid-March changed the landscape for bonds and equities.
Whilst discussions on a further fiscal stimulus ebb and flow in the Senate, the Fed have stated that they have adjusted their inflation target approach and are happy to see it above the 2% target next year to rebalance undershooting the target previously.
The very clear message is that interest rates are staying at negligible levels for the foreseeable future. Bad news for savers and retail Banks, but definitely good news for risk assets in general.
So, whilst uncertainties, be they time-bound or not, tend to increase daily mood swings and cause bad days to come along, the trend remains positive. A time for strong nerves and a level head which history teaches us will deliver better long-term outcomes for clients.