For investors, 2020 has been quite the ride. We have just emerged from the two most devastating quarters since the financial crash of 2008, interrupting what was a strengthening US economy characterised by increasing employment and robust earnings.
As we move into Q4, there are three factors that we at Skybridge Capital believe are going to define the outlook from here. Firstly, the US Federal Reserve will continue to pump money into the stock and bond markets. Secondly, interest rates will be kept close to zero. Thirdly, the excess capital created by points one and two will continue to wash through the high-growth stocks and keep investment-grade bond yields and high-yield bonds low.
Taken together, it’s clear the stock market will, like 2008/9, continue to be pulled along by the Federal Reserve and the sheer magnitude of quantitative easing.
Of course, there are two major unknowns impacting the rest of the year: the general election in November, which is shaping up to be one of the most important in the recent history of the US, and the ongoing battle against the coronavirus, which will define the rate and the manner of the recovery going into 2021.
In terms of the election, there has long been the prevailing wisdom that a Republican victory will be better for the US economy. But if you analyse the last 80 years of data – which is laid out in Jeffrey Hirsch’s Stock Trader’s Almanac – you’ll see that Democratic administrations have been better for the stock market. Ratings agency Moody’s agrees, saying that a Biden administration will create 18 million jobs in the next four years against Trump’s status quo policies that will create just 7.5 million.
If Biden wins, we can also expect more fiscal stimulus, especially if, as expected, there is a Democratic sweep of both the House and Senate. In that scenario, Nancy Pelosi’s plan to funnel more money to lower-income groups – which Republican groups are currently opposing – is sure to get signed into law. Biden will also increase taxes on corporations, probably to 28 percent from their current historic lows, to partially offset such deficit spending.
That said, it’s still Federal Reserve “uber alles” right now; as long as they’re pumping liquidity in the markets that will define the next year more than any one party’s policies.
America’s inbuilt strength
Despite the tailwinds of 2020, then, there are many reasons why I don’t see a repeat of the financial crash of 2008. If the Fed had done nothing, we would have been looking at a steep recession, possibly a depression, but because it has been loaning money to businesses large and small, and to mortgage services companies so people could make their monthly payments without defaulting – and they’re loaning this money at zero interest – they are providing an essential backstop.
They’re basically telling bond managers that, even if you sell every bond on your books, we will buy them, meaning there’s an almost permanent “put” in the market. While they do that, the economy will have enough space to grow once the pandemic is over, which will then help reduce the Fed’s balance sheet.
And the economy will grow. The US has two structural advantages over most of the industrialised world: population growth and ongoing economic innovation. The US continues to draw the best brains and creativity from around the world, which creates an unending cycle of global industries head-quartered in America – just look at the DOW Jones 25 years ago and note where GE Capital is in comparison to, say, Apple.
For instance, I predict that SpaceX will be one of the top 10 or 15 companies in five years’ time. Their development of the Starlink internet satellite system, reusable rockets and sub-orbital transportation has created a $46bn private company, which could be worth $200bn when it goes public. It already has better fundamentals than Tesla – and that’s now trading at $300bn. This is exactly the kind of American innovation that will help keep fuelling the market.
Where I do see the problems occurring is how much excess capital in the system is flowing into high-growth stocks. Any time that’s happened in the past – and I’m thinking of the Nifty 50 in the 1970s and early 80s – there has been a correction. Stocks that have values at 100 times earnings can’t sustain that multiple no matter how much they grow.
Right now, you have six or seven stocks that have been driving the market for the last six months. But that means the picture can change on you very quickly: Apple, for instance, lost half a trillion dollars over the course of 17 trading days last month. So, at Skybridge, we’re long on core equities but we’re staying away from those top 15 tech companies. They’re too expensive right now with too little upside.
Bullish on America
On the whole, though, there are reasons to be bullish on America and US stocks. Although we have a cantankerous, tribal, dysfunctional political culture right now, we still have integrity in the system – the diffusion of power at the top means that the world’s population, while disappointed in the current administration, still has confidence in the US and its laws, its innovation and its platform for economic growth.
If, in November, we can get back to established, respected leadership, one that restores faith in the institutions of democracy and the rule of law, and one that prioritises finding a pathway out of Covid-19, we will see a return to robust growth. Considering the US is still 25 percent of the global economy, that is good news for the whole world.
Anthony Scaramucci is the CEO of Skybridge Capital and a former spokesman for President Trump.
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