HEY BIG SPENDERS!
£1.4tn package from Biden and Harris stokes inflation fears
THe imminent arrival of a big spending Joe Biden and Kamala Harris- led White House has reawakened inflation concerns in the United States and raised the prospect of higher interest rates.
The interest yield on American 10-Year bonds climbed sharply to 1.138pc, its highest level since the start of the pandemic, after the presidentelect unveiled a vast £1.4 trillion spending package. This is in addition to the £729bn leaving present from Donald Trump approved by Congress in December.
At the core of the Biden package is a cheque for over £1,000 to be paid to every American household, in addition to the £438 already in the post to citizens following the departing Trump’s stimulus.
Biden’s far reaching package includes new funding to speed the Covid vaccine rollout and funds designed to help cities and states plug huge budget deficits built up as a result of the pandemic. The presidentelect is making it clear that the current proposal is only the down payment on a further economic package which could lavish hundreds of billions of spending on infrastructure and clean energy projects, such as a national network of charging stations for electric cars. The president plans to fund some of this by rescinding tax breaks for the wealthy which were part of the Trump agenda.
‘Right now markets are celebrating the additional stimulus and see it as a bridge to a fully re-opened economy,’ Jeff Buchbinder, the top equity strategist at the advice network LPL Financial, told data provider Refinitiv. ‘On the other side of it there is the chance that markets will pay for this in the form of sharply higher interest rates or tax hikes.’
The new round of support proposed for the US economy comes amid fears that output is stuttering and unemployment surging again as the second wave of Covid-19 sweeps across the country, locking down several regions including California, the nation’s most productive and prosperous state.
The latest US labour market data released on Thursday showed that 965,000 joined the unemployment queues in the last week. Millions have been sidelined by the pandemic with 284,000 – not receiving jobless benefit – currently seeking funds from an emergency pandemic assistance programme.
With infections and deaths rising in the final weeks of 2020, US retail sales fell 0.7pc in December. Oxford economics said the data ‘bodes ill for the economy’s performance in the first quarter of 2021’. In spite of surging bond yields and fears of renewed inflation, Federal Reserve chairman Jay Powell has made it clear the intention to continue with the massive programme of bond purchases – quantitative easing – as part of the effort to keep interest rates low to support the pandemic affected economy.
His comments were intended to allay market fears that the Fed would pull up the monetary drawbridge now that the bigger spending Democrats control the White House and Congress.
UK investors have seldom been so bemused by events in the US, which are more farfetched than many movies now on Netflix. The inauguration of Joe Biden as the 46th president takes place on Wednesday amid unprecedented turbulence. Donald Trump faces impeachment following his supporters’ attack on the Capitol, as Covid-19 rampages from coast to coast.
Almost as bewildering, but also a must- watch, is the extraordinary mood of the stock markets. The leading indices appear curiously unperturbed by the turmoil.
There is a determination to accentuate the positives, such as the vaccine rollout, although the tighter regulation and more burdensome taxes faced by the Silicon Valley giants did cause the technology-heavy Nasdaq to falter a little this week.
Is this the moment to sell these shares that have thrived in lockdowns, and bet on the ‘Dogs of the Dow’, the names that lagged behind in 2020, including CocaCola, IBM and Walgreens?
Or is it better to assume that the shift to online has become permanent? Tech stocks may grow more modestly in 2021. But the S&P 500, which rose by 16pc in 2020, is still forecast to move upwards in 2021 to 4,000 or above, with Biden’s policies boosting both the economy and share prices.
Bank shares are rallying and Americans are pouring money into clean energy funds to benefit from Biden’s $ 2 trillion green energy programme. America’s fourth quarter corporate earnings season has begun. If results reveal deeper-than- expected woe, the Biden administration may deliver extra stimulus cash, with $2,000 ‘ helicopter money’ cheques to some households.
A $900bn package has already been agreed, with the Federal Reserve, the central bank, also pumping billions into the economy. There are fears these subsidies could stoke inflation, sparking an interest rate increase and dampening market optimism.
Yet, for the moment, the stimulus programme is underpinning share prices. The belief it will all end in tears led to an intervention from Jeremy Grantham, the 82year-old British founder of GMO, a Boston-based group. He contends that US markets are in a ‘fully-fledged epic bubble state’.
Most other professionals are more confident. Fiona Harris, US specialist at JP Morgan Asset Management (JPAM) says: ‘We’re hoping that this is the year of the vaccine, not of the virus and of the recovery, not the recession.’
She argues that the Biden administration will make stimulus its priority, rather than raising taxes. Although JPAM managers have trimmed some tech holdings, she explains that these titans may not, as is feared in some quarters, be enfeebled by more onerous regulation under the new president. The focus of anti-trust laws is on the potential damage to consumers, which would enable Google-owner Alphabet to claim free searches are a boon to users.
JANET Mui, investment director at Brewin Dolphin, believes the Democrats could be good for share prices: ‘We’re glass half-full about the outlook. The slim Democrat Senate majority means it will be harder to get more Leftwing measures through.’
Mui expects this will be the year when Asian markets outshine America, partly as a result of Biden’s more nuanced approach towards China.
However most investors will want exposure to the US at this inflection point in its history. Thrill seekers could buy the ‘Dogs of the Dow’, hoping that the predicted switch to cheaper, ‘value’ stocks comes to pass. Some would probably prefer a broadly-based fund, such as Dodge & Cox Worldwide US Stock which has tech stakes, but holds banks too. JP Morgan’s American investment trust also offers a mix of tech, banks and healthcare.
Teodor Dilov of Interactive Investors recommends the Brown Advisory US Sustainable Growth Fund for those who want to back the green energy drive.
For simplicity, you could opt for an S&P tracker fund. But Jason Hollands of Tilney Bestinvest warns: ‘Tech accounts for 28pc of this index. Facebook, Alphabet and Twitter – which are considered to be communication services companies – make up another 11pc.’
In other words, trackers are skewed towards tech.
Thousands are already backing the American dream through the top- selling Baillie Gifford funds and trusts which excelled in 2020, thanks to Amazon whose shares have soared by 66pc over the past 12 months and Tesla, which is up by a phenomenal 788pc.
Some investors may opt to take profits, but I suspect that Baillie Gifford will endeavour to ensure it maintains its reputation for results. Observing this and the response of the markets to the new era of American politics will be for me one of the unmissable spectacles of 2021.