US policy renews tailwind for growth assets
The US Government's USD 2Trillion fiscal stimulus underwrote US economic activity during the second half of 2020 and unquestionably supported aggregate demand. Policy makers have dominated markets recently and will continue heavily influencing them in the near term.
Last night (13 January 2021) we had the US Fed confirm no tapering on QE. This means cash will continue being injected into the US financial system suppressing interest rates. Today we also expect to hear from US President Biden what the US fiscal trajectory will be for 2021 (provided legislation can be passed). Taken together - monetary and fiscal policy will become clear for the near term as global markets receive guidance on policymaker interventions in the largest economy in the world.
The impact on share markets will be profound. The value of a financial asset is the present value of its future cashflows - the market is receiving information on the US Government underwriting its economy (which firms up corporate cash generation) as well as the discount rates used to value those cashflows. On the surface this is bullish for shares.
The US bond market's expected behaviour will also be key as it will drive other markets such as currency exchange rates. The USD remains the key global currency and a weaker USD over the last 3 quarters of 2020 was a tailwind for EM assets. The US Dollar weakened 9.7% relative to the Australian Dollar over 2020 supporting the purchasing power of Australian investors looking to purchase American assets.
For those building capital for reasons like helping a kid or grandkid purchase real estate, or building a legacy, the policymaker interventions over 2021 is pointing to a renewed tailwind for growth assets. Given weakened income generation from investment assets like cash and bonds this new information may aide asset allocation decisions you are considering.