Politics, COVID-19 and the New Business Cycle

 In Strategy Updates

As you know, in recent months we have been discussing the likelihood that we have entered a new business cycle and a new bull market. Last week’s election results and today’s news of a potential COVID-19 vaccine only strengthens our viewpoint – and markets have reacted with enthusiasm.

The financial markets appeared to support a Biden win prior to last week and the potential division of Congress between a probable Republican Senate and Democrat House should keep a healthy balance for the economy and financial markets.

The vaccine developed by Pfizer is reportedly 90% effective and has been the most promising treatment to combat the virus since its inception. Though this is a very promising development on the road to a COVID-19 free society, we are aware that there is still a journey ahead in terms of current cases, continued testing of the vaccine and its eventual dissemination throughout the United States and globally.

In terms of financial markets, the mere idea that society is getting closer to a vaccine is cause for investors to buy stocks in anticipation of future growth. A reminder that stock markets are a “discount mechanism” for future changes. By the time a vaccine is a reality, stock prices will have already risen reflecting that fact. Hence it is always better to be early when investing in markets.

The end of political uncertainty, better earnings growth, continued monetary and fiscal stimulus and the promise of a vaccine are supportive of higher stock prices and our view that we have entered a new business cycle and bull market.  When we take these new data points and recall that stock indexes are only slightly higher than they were three years ago, we see much further upside over the next few years, so we remain bullish on stocks not just here in the US, but overseas as well.

In terms of your equity portfolio we have been adjusting your exposure to companies that we feel will be beneficiaries of this new business cycle and a potential vaccine, especially companies in the industrial, materials, financial and technology sectors.

It has been a fascinating time to be an investor and certainly has had its challenges in recent years. However, we may be entering a period of more consistency on many fronts and hopefully a smoother path for markets. Though we are optimistic in terms of our view and recent events, we continue to employ our Active Risk Management in case any number of these positive developments do not come to fruition. This includes your exposure to stocks, sector management and carefully placed stop loss orders.

We hope this short update finds you well. Please let us know if you have experienced any change in your financial circumstances or if you have any questions about our work.

Thanks again for your continued vote of confidence in Main Street Research!

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