Transcript
Happy New Year and welcome back to Thoughts on the Market, I'm Andrew Sheets, and this year we are excited to bring you even more perspectives from the research team at Morgan Stanley; Monday through Friday, every week. We hope you enjoy the new voices, new music and same great market takeaways you've come to expect. It's Thursday, January 7th, at 2:00 p.m. in London.
Tuesday's special election in Georgia safely qualifies as the first surprise of 2021. My colleague Michael Zezas discussed on his episode about what this might and might not mean for policy, and I wanted to expand on the market implications, and why we think this surprise supports more reflation and rotation in portfolios.
The first implication of the Georgia results relates to a risk to our base case. We're constructive for 2021 and expect solid returns. But a key risk to this story would be that we're underestimating the risks of a new COVID variant or a slow vaccination program, and that policymakers don't meet these challenges with further support. The 'and' in that previous sentence is really important. Additional policy help makes it much easier for the market to look through these challenges, as we saw last year.
The Georgia results are important for this scenario because they make it much more likely that Congress would take action, and quickly, if the economy evolved worse than our current base case.
The second implication is at the other end of the spectrum, to the upside. We think there's a good chance that the new Congress will push for up to $1T in additional economic support, including $2000 direct payments, even if the economy doesn't go through a new additional deterioration. That would provide further support to the recovery, and importantly, drive more confidence that inflation can rise from currently depressed levels. We think U.S. growth and inflation will both exceed expectations this year, and our investment preferences are heavily skewed towards areas of the market that would benefit if this came to pass.
The third implication is more of an observation. There's a theory that markets are efficient and immediately move to price in all new available information. But in this case, I really don't think that holds. This was a genuine surprise, and even active political observers saw these races as extremely close - as indeed, they were. Meanwhile, we think many investors had penciled in divided government as a base case for 2020 following the November elections. It would shock me, if all of those views were able to completely adjust in just a day or two.
We think the Georgia election results reduce one downside risk to the market and raise the chances for higher growth and higher inflation in 2021. And what are the risks? Higher growth and inflation should, ultimately, drive longer run interest rates higher, and drive a shift in leadership between assets that benefit from this, and those that do not. We like financials, as an inexpensive sector that offers some diversification against a higher interest rate scenario, and we remain underweight government bonds.
Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people find the show.
