The Week: Tough times for Uncle Sam

The upcoming election has showed US democracy in an unflattering light: there are tough times ahead for the land of stars and stripes.

  • Whoever wins the White House in November comes with some unappealing strings attached.
  • US GDP fell at a rate of 31.4% in the April-June quarter
  • Apple’s P/E ratio is around twice its level of a year ago.

The presidential election debate was not the best advertisement for US democracy. Two septuagenarians showing scant regard for the norms of social interaction and politeness and even less for the pressing issues facing the country, many voters will wonder how this the best both parties had to offer.

This may be the reason US markets appear to have lost their lustre. Suddenly the US does not look like the land of hope, opportunity and unfettered capitalism, but rather one of racism, protectionism and division. There has been some weakness in the Dollar and in those prize US assets, the technology giants.

The problem is that whoever wins the White House in November comes with some rather unappealing strings attached. A Donald Trump term spells more protectionism, an ongoing spat with China and erratic policymaking. A Joe Biden presidency could see capitalism restrained – a possible break-up of the major technology companies, curbs on pharmaceutical pricing and some raising of corporate taxes. At the same time if the election is tight, investors may have to deal with wobbly markets while the result is decided. The S&P 500 was down 8% while the George W Bush/Al Gore ‘hanging chads’ debacle was resolved.

This would all be fine were the US economy in great shape: usually investors can put political dramas behind them if the economy is on form. It isn’t. US GDP fell at a rate of 31.4% in the April-June quarter, a meagre improvement from the 31.7% drop estimated a month ago. While some optimists continue to predict a swift revival for the US economy, there is precious little sign of it yet. Covid cases may be running at around half their peak in July, but they are still at around 35,000 per day. Daily deaths continue to be in the hundreds.

And again, investors might be able to overlook a lacklustre economy if valuations were compelling, but the valuations of global technology stocks are at all-time highs. Apple’s P/E ratio is around twice its level of a year ago. While earnings have been strong, this multiple expansion looks excessive.

In short, it is difficult to make a compelling argument for the US today. However, too often when the US does badly, everywhere else does even worse. This remains a possibility. The question for investors may be whether Asian markets can decouple from the problems in the US and build their own self-sustaining growth trajectory.