This is an excerpt from our most recent Economic Outlook report. To access the full PDF, please click here.
While the coronavirus continues to take a toll on our social and economic activity, and the infections and death tolls climb new staggering heights, the investing world appears to have shifted some attention toward the upcoming election. This November 3rd event remained on the backburner for the better part of this year.
Since both events will now be sharing the limelight, it is reasonable to expect increased levels of financial market volatility, too. With a resurgence of COVID-19 infections looming, and with both Presidential candidates ramping up their election rhetoric.
What about any effect beyond the noise?
Make no mistake. Both continued partial COVID-19 lockdowns and the upcoming election will leave their mark on our society and economy. Many areas will undergo drastic changes.
Elections are important beyond their impact on the investing environment to all of us. They help drive policies which shape our everyday lives. In particular, the outcome of the congressional races will be key. Control of the Senate will play the most important role in the ability of the Presidential winner to enact his agenda.
But what does this mean for investors? Do we also need to radically change our investment approach and shift into different asset classes?
The latest rally in gold prices would lead you to believe that, it seems. But over long periods of time, you would have to get each of the gold rallies right. Years of upside often beget years of downside.
Whereas the S&P 500 large-cap share index exhibits a long-term steady upwards drift. That makes it easier for the average investor to set it and forget it, despite short-term violent gyrations.
Consult the two asset prices in the 50-year timeline below.
Gold Prices (in blue) and the S&P 500 (in red) Shown Below. 1968 to 2020.
This is our expectation:
The upcoming election cycle will prove to be similar in this regard. It will contribute to another round of wild, but very short-term gyrations. Hedge funds can and will game the event outcome, selling stocks to take profits, or buying stocks to cover shorts. Given the sheer number of mail-in ballots, there may well be a delay in announcing the winner.
That won’t derail the stock market from its long-term upward drift.
Put differently, it is our conviction. In the long-term -- economic fundamentals will be a much more important drivers for stocks -- than the resident at 1600 Pennsylvania Avenue.
Nevertheless, the outcome of the Presidential election has meaningful implications, and we want to highlight a few important ones that we expect under various scenarios.
There are plenty of articles out there on sector implications for a Biden win or a Trump win.
What struck us as the best sector narrative? Reuters put up these thoughts in front of that brutal first Presidential debate:
“Some U.S. stocks could face more volatility next week as President Donald Trump and rival Joe Biden face off in their first debate ahead of a November election that betting services currently view as almost a coin flip. A strong performance in Tuesday's debate by Biden, who currently has a modest lead in betting odds and polls, might boost stocks related to global trade and renewable energy, while a perceived debate victory by Trump could benefit fossil fuel and defense companies.”
What actually happened? All S&P 500 sectors rallied big the day after that brutal first debate.
We still like those sector calls, though. Looking out across 2021, we would add a bullish tone to health care stocks on a Biden win.
However, we would not put much emphasis on a Biden or a Trump trade. There usually isn't one, at or after the election, as it is already priced in. Markets usually are pricing in what is out 6-12-18 months ahead, not one month ahead.
With about a month to go, portfolio managers are likely to reduce their risk exposure, if they haven’t already.
Independent of who wins the election, we still have a U.S. economy that is operating at nowhere near full capacity. It will require any Federal, State or Local help it can get. Fiscal stimulus policy through taxation and spending will remain paramount in ensuring a smooth recovery path.
Finally, it is our expectation a Biden presidency might lead to a stronger focus on providing spending or tax breaks targeted towards lower- and middle-income households.
This would ultimately support broad consumer spending growth.
These Stocks Are Poised to Soar Past the Pandemic
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