FNArena’s Weekly Insights – November 09 2020
In this week’s Weekly Insights:
-Why Are Equities Rallying?
-Question Of The Week
-Rudi Talks
-Conviction Calls
Why Are Equities Rallying?
By Rudi Filapek-Vandyck, Editor FNArena
Despite the 45th president of the United States’ claim that if he were voted out of office, the share market would tank savagely, equities the world around are having a jolly good time in November.
Of course, it’s far too easy to draw solely a direct connection with the outcome of the US elections; that isn’t the full story by a long shot.
As predictions prior to November 3 had tightened around a likely win for challengers Biden & Harris, some institutional funds had positioned for a renewed boost for the so-called reflation trade, whereby trillions of stimulus enacted by Democrats in power would improve operational conditions and the outlook for share market laggards including oil & gas stocks, financials and other cyclicals.
That scenario hasn’t gone 100% missing, but it is now linked to a successful vaccine-development, which remains a genuine possibility, but it remains uncertain.
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Other investors had elected to take some cash out of the market, and that cash is now rapidly re-entering, which easily explains the strong gains witnessed for US equities last week, as well as in Australia.
That sudden switch in momentum has been backed up by the US bond market which saw yields initially creeping higher on anticipation of trillions of dollars in Democrat stimulus-spending, but the yield on US treasuries has once again retreated since, which has been taken as a signal that it’s safe again to buy into US technology stocks.
In simple terms: rising bond yields weigh on valuations for longer dated assets and capital light business models, meaning: today’s technology stocks, and falling yields provide for an extra boost to those valuations.
Such moves are usually replicated on the Australian bourse, but because large tech like Apple, Alphabet, Microsoft, Amazon and the like nowadays represent some 40% of the S&P500, the gains for the Australian share market have once again been but a shadow of those seen in the USA.
