As the US election count drags on, wealth management firms speculate on what this means for markets and economic sectors, and give views on what investors should do. A common theme is that if the US ends up with "divided" government, it is not necessarily a bad thing for markets.
As the US election count continues – with controversy about whether specific state counts will be legally challenged (Michigan, other) – here are more reactions from wealth managers about likely scenarios. We will add more when those that seem particularly relevant to Family Wealth Report’s audience come in.
As far as the FWR editorial team can judge, markets appear to have rallied on the perceived notion that a Biden win with a Republican Senate - while it would be a classic “gridlock” scenario - will at least prevent a dramatic Leftward shift on tax. (This is an issue that wealth managers concerned about client portfolios would have been following). Periods of divided government have sometimes coincided with stronger markets (as during the Clinton presidency). But of course there are other factors at play. What will a change of administration – assuming it happens – mean for areas such as fracking, healthcare, regulation of “Big Tech”, US-China trade, huge public debt, and US trade relations with the European Union? There will be plenty of topics to discuss in coming days.
CIBC Private Wealth
Once again, polls and oddsmakers led the country astray. President Trump and Republican candidates generally outperformed expectations. There was no Democratic “blue wave.” As in 2016, the investor consensus looks wrong, at least for now. The most feared outcome was a close, uncertain, contested election that goes on for days or longer. That appears to be what we have, yet the stock and bond markets rallied substantially today (November 4).
Republicans are likely to retain a slim majority in the US Senate. As described below, we believe that this is the primary reason for the bullish reaction in stock and bond markets. Republicans are likely to gain a handful of seats in the House of Representatives, but Democrats will retain a majority. Putting it all together, the continuation of a divided Congress in 2021 appears to be the most likely outcome.
We attribute this [market gain] to the out-of-consensus result pointing to continued Republican control of the Senate. This mitigates the risk of tax increases on corporations and investors proposed by Joe Biden, should he become president. Looking at market internals, there was a downgrading of stocks likely to benefit from Biden’s policies, while those forecast to be out of favor under a Democratic government outperformed. The best-performing sector was healthcare, where a Republican Senate would probably block Biden’s plan to add a public option to the Affordable Care Act and institute price limits on prescription drugs. The renewable energy and infrastructure industries performed poorly, while fossil fuel-based companies were mostly higher.
Treasury bond yields moved sharply lower, with the 10-year yield falling to 0.77 per cent from 0.90 per cent the day before. A Republican Senate is viewed as fiscally austere relative to the Democratic House of Representatives or either potential president. Thus, bonds are rallying on a lower-than-feared federal deficit and debt outlook.
Bonds may also be rallying because a Republican Senate would most likely favor a smaller post-election COVID-19 relief package than a Democratic Congress. A scaled-down relief package would provide less support for a potentially flagging economic recovery as the coronavirus further disrupts households and businesses over the winter. There was some evidence of this in the stock market as well, as the COVID-19 “stay-at-home stocks” outperformed, and traditionally cyclical sectors - industrials, materials and banks - lagged.
While the initial reaction was positive, markets will likely be subject to volatility in the days ahead, as long as the presidential race remains uncertain. For now, investors are embracing the old market adage that, in Washington, gridlock is good.
Rick Lacaille, global chief investment officer at State Street Global Advisors
The US election has seen a tremendously large turn-out, great participation is a great result. Both candidates at this stage often claim victory, but it’s rare that we see an invocation of the court system at this point, and we expect quite a lot of market volatility. However, the core investment conditions that we see for the next 12 months won’t be reversed by this volatility. The monetary and fiscal stimulus that we’ve seen so far to counter the pandemic is yet to work its way fully through the system, and we expect that it will be one of the big influences on investment conditions in the next 12 months.
From an investment perspective high quality equities and staples are expected to do better. While areas like healthcare may still do well, particularly if Congress is likely to be split and there is a need for a lot of consensus-building before more radical policies take root, we should avoid outright bets, for example, on renewables or the oil and gas sector.
We should also position ourselves for a bit of a lower dollar and a little bit more in terms of medium term inflation, as we are in a deflationary environment. These are conditions which, with monetary and fiscal stimulus in place, are favorable toward equity investment in the medium term. We should also bear in mind that the volatility that this presidential election still can cause as we wait patiently for a final result, and a risk budget is very important.
Jan Blakeley Holman, director of advisor education at Thornburg Investment Management
A concern that looms over the result of every presidential election: investors’ money.
Let’s revisit the returns of the S&P 500, following past elections:
The truth is that who is president hasn’t really mattered.
Out of the 23 administrations since 1929, only four have delivered negative investment returns. That means 83 per cent of the time investors have earned positive returns regardless of the president. In addition, since 1926, the market has risen in spite of the fact that over that time we’ve endured 16 actual recessions, numerous anticipated recessions, societal unrest, assassinations, wars, political scandals and Congressional inertia.
What about different concurrent party leadership in the executive and legislative branches? There’s an upside: since 1933, mixed-party control of the executive and legislative branches has actually yielded positive investment returns.
Bottom line: despite short-term market fluctuations, investors who invest for the long-term are more likely to achieve their goals than investors who bob, weave and make changes with every short-term event.
Jason Brady, president and CEO at Thornburg Investment Management
A Biden-McConnell matchup may not be as polarizing as anticipated. While Democrats and Republicans generally have differing opinions regarding energy and healthcare, Vice President Joe Biden and Senate Majority Leader Mitch McConnell agree on the regulation of Big Tech and China trade policy. A Biden win means a changed regulatory agenda, not necessarily because of a change in the administration, but because Biden is more aligned with the Senate majority leader.
Think big picture and long term. We’re aiming to balance our portfolios relative to what’s happening in the markets. Putting all our chips on the table is not in the best interest of investors. So, we want to create portfolios for clients that perform well in all environments. On the fixed income side, we have lightened a bit of duration as the markets have seen enthusiasm for stimulus and certainly a lot of issuance. Regardless of a Biden or Trump win or a continued Republican-controlled Senate, we’re going to see a lot more Treasury issuance.
Elections aren’t a big deal for markets. Investors rightfully tend to focus on the outcome of the election as it relates to policies. Of note, I see the assumption in the market of a changed energy policy, but energy represents a tiny portion of the S&P 500. I think investors should be focused on the forward pathway of both the US and global economy, and the usual economic health indicators and data points over the next three to six months.