Biden’s in, but the Fed’s got the power, writes Mike Taylor, CEO and founder of Pie Funds.
The results are in and, as predicted by the polls, it was a victory for US Democrat Joe Biden, but by the thinnest of margins. The election result will be contested and it’s hard to see Donald Trump going down without a fight, or even gracefully.
Whatever your political views, if nothing else “President” Trump provided the world with high-stakes entertainment, running his office at times like a twisted game-show. Oh that’s right, he used to do that before he was elected. Will someone now please shut down his Twitter account!
Trump’s term positive for US shares
From an investment perspective his four-year term will be remembered as being positive for the US stock market. However, how much of that is attributable to his tax cuts and economic policy and how much is attributable to Fed policy? In fact, the market suffered under much of his presidency as the Fed began to raise rates through 2017 and 2018 (which ultimately culminated in the Fed doing an about-face in 2019). This year’s rally was once again fuelled by unprecedented support from the US Fed.
What’s clear from the markets’ initial reaction to the result is that we remain in a bull market. Why? Because despite the election result delivering the nightmare scenario many feared, investors have cheered stocks higher. Contested? Yes, but still likely a Biden victory, but with the Republicans controlling the purse strings, ensuring the tax cuts can’t be repealed.
George W Bush was inaugurated in early 2001 and was supposed to be pro-business. He was certainly pro-war and it would have been a good time to buy energy stocks. But as for the stock market, the Nasdaq collapsed and it was only Fed Chair Alan Greenspan who rescued the market with zero rates in 2003. In addition, under pro-business Bush, banks were allowed to over-leverage their balance sheets, which in effect caused the GFC.
When Barack Obama was sworn in in early 2009, into what was the worst recession since the Great Depression, markets kept falling and his term as president was not expected to go well as far as the market was concerned. However, once again, enter the Fed, with chair Ben Bernanke armed with his doctorate on mistakes of the Great Depression. The Fed rode to the rescue and initiated the first round of QE, continuing this for a number of years. Having been a winner out of QE, if I could buy Bernanke a beer I would!
Fed Reserve policy is key
It’s fairly obvious then that Federal Reserve policy, including interest rate, liquidity and quantitative easing, is the main driving force behind markets – everything else is just noise. Turn the volume down. I would say the same about New Zealand and our equity and property markets, with the current experiment by Adrian Orr, Governor of the Reserve Bank of New Zealand. However, that’s a discussion for another day.
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