In the final months before the US presidential elections, as Joe Biden’s lead in the polls proved unshakeable, financial markets became convinced of his eventual victory. Enter a very different market narrative to the one that had been driving sector performance since the pandemic lows of the spring. We take a look at this so-called reflation trade, the winners and losers and where the story might take us from here.

As the presidential contender, Joe Biden laid out a clear intention to reboot the US economy in highly targeted ways. His promise was to ‘build back better’ and a $2 trillion package of spending was proposed for investment in sustainable industries, creating green manufacturing jobs. Such a package could breathe life into, or reflate, the old economy. Under Biden, industries supplying this infrastructure would benefit. It would not be only the big tech companies reaping the post-pandemic legacy.

Equity markets witnessed a switch in sector leaders. The narrow dominance of the FAANGs was challenged by industrials and materials stocks, as infrastructure spending pushes demand for both of these elements. Financial stocks picked up, galvanised by hopes for stronger growth and the possibility of better earnings with lower loan losses. In short, long-unloved Value began to shine out from behind overshadowing Growth sectors.

But what of the bond markets? Government bond yields typically rise (and prices fall), when growth, and with it interest rates, looks set on an upward path. It’s interesting to note that the direction of US Treasury yields appeared to turn in early August. Perhaps the very point when a Biden victory became a done deal, as far as the bond markets were concerned. And the reflation trade took over from there, while bond yields crept higher.

The US election results are not yet clear cut. Biden was given victory in the White House, but failed to sweep in a ‘blue wave’ of Democrat senators, who could have pushed the button on his stimulus promises. Final results have been delayed until the new year, letting some air out of the tyres for overinflated infrastructure spending hopes. But the successes reported by recent vaccine trials have given their own fillip to the growth recovery story, providing momentum to the reflation trade.