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It’s tempting to explain the rebound in the stock market with the outcome of the US elections, writes Nikolaj Schmidt, chief international economist at asset manager T. Rowe Price, in the company’s publication Insights on Global Economics. But personally, he believes that the joy of the stock markets has more to do with the fact that the elections are overcrowded than with the electoral results. The fact that the elections have been completed means that markets no longer have to worry about election results, he says.
Nikolaj Schmidt writes that it has been clear for some time that we are in an early stage of a new expansionary business cycle, which the market has not been able to assimilate due to concerns about the fallout from the autumn elections.
“New stimuli in motion”
Expansive business cycles should be viewed and measured this year rather than months, and stocks and loans tend to cycle. Right now, it is the good results of the vaccine manufacturers that are in focus, and Nikolaj Schmidt is convinced that the vaccine in particular is one of the strongest drivers in the current “risk rally.”
But there are more factors, he notes. The other driving force in the markets right now is the prospect of major new stimulus likely to follow the outcome of the elections in the US The risk that decision makers will turn around and start advocating for a more restrictive economic policy is non-existent, at least until the second half of this year.
“See the pandemic in the rear view mirror”
With Democrats winning the last Senate elections in Georgia earlier this year, it has become easier for the new president to push through major stimulus packages in Congress.
The vaccine launch drives different asset prices, as investors live in hopes that sometime in June we will have to look at the pandemic through the rearview mirror.
If there is such a successful development, the uncertainty will decrease and consumption will rise to something like an “economic boom”, writes Nikolaj Schmidt.
“Three dangers lurk among the reeds”
But in this scenario, there are three dangers lurking among the reeds. The first is that growing inflationary pressures are being created by stimulus packages around the world. The second risk is that the virus develops into more and more mutations, and therefore the vaccine will not work as expected.
The third risk is that China, despite the admirable recovery of the economy after the pandemic, will not be successful in the long term, but will be forced to adjust again.
It is not possible to rule out all three risks, says Nikolaj Schmidt, but personally he believes more in the prices of higher and continuous assets, modified with temporary corrections. He believes that the trend of higher prices continues and in that case any correction should be considered a buying opportunity.
