With only a few days left before the US elections, it may be helpful for investors to look past the results and focus on what we do know, as some factors are unlikely to significantly change regardless of who sits in the White House.

Economic Resilience (Except in Europe)
Economic data in the US is holding up well, despite higher Covid-19 caseloads and the lack of a subsequent pandemic fiscal package.

Yes, savings are coming down from their forced lockdown highs, but spending is proving resilient. The labor market is gradually improving and the housing market is booming. The Chinese economy is doing even better, with a number of markers back above 2019 levels and expectations for a positive GDP print for 2020 overall.

Concern for Europe, however, is justified. The sharp rise in cases since the end of summer has led to a drop in PMIs,¹ in consumer confidence, in inflation; and the just-announced lockdowns, albeit lighter than in the spring, indicate the fourth quarter will suffer even more than previously anticipated.

With a long winter ahead, growth and earnings expectations will probably need to be adjusted downward, including for 2021.

Additional Support Measures?
The fiscal impetus is likely to shift to the US again. A number of European countries have already increased or extended support measures, but they are unlikely to be large enough for the extended period of sub-par activity. The EU Recovery Fund should be approved this year, but it will take time to implement and its size might fall short of needs.

In the US, legislators could not agree to fiscal stimulus in advance of elections, but we know it is coming. The size will depend on the results of the election, but we are confident that at least $1.5 trillion can be expected at some point, and upwards of $3 trillion in the event of a “Blue Wave,” or Democratic Party victories in the White House and Senate.

While fiscal spending is really all that matters at this point, we can still count on central banks and their nearly unlimited support. The European Central Bank and the Bank of England are set to increase their quantitative easing (QE)² programs in the coming months, and the Federal Reserve could follow suit as inflation expectations have not materially risen.

Moreover, central bank actions are keeping bond markets, including credit spreads, very well behaved, which should continue in the coming months. I will be keeping an eye on Treasury yields with a Democratic sweep, but I believe they should remain contained.

Overall, I remain constructive on risk assets over the medium term, even if the short term might see further volatility. Sentiment had become more bullish on fiscal stimulus optimism, but has now retreated again, bringing a positive technical support.

Cash levels remain elevated. While the Q3 earnings season has been good so far, the outlook for 2021 is what will drive markets, and investors could see a differentiation between the US and Europe given the virus situation.

Europe will need more confidence in the economic outlook for the reopening trade to support the more cyclical region. Finally, while the next few weeks could prove complicated, election volatility tends to be short-lived. A focus on the long term is important.

Equities
The pre-election volatility has materialized and it could last a bit longer, but I maintain a constructive outlook over the medium term. While next week’s election results can have a big impact on US policymaking for the coming years, underlying supportive factors for equity markets will likely remain in place, regardless of who is president.

Indeed, the fourth phase of US fiscal stimulus is coming, even if markets have to wait until February 2021. Central bank support may no longer be an incremental additional support, but it is maintaining a base. Cash levels remain elevated and positioning has retreated back to more bearish territory after a jump based on fiscal spending optimism.

Indeed, a Blue Wave would see significant spending and polls indicate it is still the most likely scenario, though confidence in this result has faded recently.

Concerns surrounding the virus have spiked in Europe with renewed, albeit lighter, lockdowns, but I believe US virus concerns could be overdone and do not expect large-scale lockdowns; growth has proved resilient despite higher cases.

As such, I believe that more confidence in the recovery will be needed before Europe benefits from a re-opening trade. Then, it can play catch-up to its US counterparts. In addition, I believe emerging Asia should benefit from strong Chinese growth and a good handling of the health situation.