Election Day has come and gone (my house is pleasantly quiet now that the political calls have stopped coming in!) and, although the results aren’t completely in, we have a much better feel for what government will probably look like for the next couple of years. My first observation, while not directly stock market related, is that it looks like our country is very evenly split between Democrats and Republicans. To me, that is comforting, in that it indicates that neither the far-left nor the far-right has an advantage when it comes to public policy. That should provide some measure of stability.
From a markets perspective, we have advocated that investors not make large changes to their target allocations due to the election. I’ve used the analogy that the election was only one of the ingredients of the “stew” that makes up stock market expectations and results. There are many ingredients in the stew, and COVID response might be the biggest one. As vaccine and therapeutics news has been introduced over the past few days, it has had a bigger impact than the election results.
With Mr. Biden likely the winner of the Presidential race, the House of Representatives keeping its Democratic majority (although by a smaller margin), and the Republicans likely keeping a majority in the Senate (perhaps by a smaller margin), the odds of major policy changes, including increased taxation, have been reduced. The stock market likes that idea. This may mean, though, that fiscal stimulus is less likely, or might be smaller than under a “Blue Wave” scenario, meaning that less money would be pumped into the economy, which the stock market doesn’t like. Anything other than these scenarios (if Democrats won control of the Senate, for instance) would probably increase volatility in the stock market, with possible downside risk as investors react to different news.
The outcome probably also means a more diplomatic foreign policy, although both parties seem to favor a tough stance on China. That was one of the few areas where President Trump and Senator Bernie Sanders actually agreed! The likely outcome of gridlock also reduces the chances for major healthcare changes, minimum wage hikes (at least dramatic ones), and anti-trust regulation.
The stock market’s reaction to the election, +7% on the S&P 500, is consistent with investor belief that there will likely be more stimulus, even if the amount is lower than it had hoped for. Combined with the vaccine and therapeutics news, we currently believe that this favors continued stock market strength. This will likely come at the expense of bond market weakness, and we have seen bond prices tick lower already (pushing their interest rates higher). There are some risks, including some travel industry-related bankruptcies, municipal bond defaults, and more diplomatic conflict with China. On the other hand, we are headed into a seasonally favorable period of the year for stocks, and many forward-looking indicators are quite positive. We’ll take all of that into consideration when making investment decisions.
We aren’t suggesting major changes, but are making some tweaks. We think investors should look toward more cyclical areas like industrials and basic materials, essentially favoring sectors than have been “unloved” in the stock market’s recovery. That recovery has largely been due to outsized gains in work-from-home stocks, especially in the technology sector. Technology still looks great, and should not be abandoned, but trimming profits from tech and redeploying that toward cyclicals makes a lot of sense to us. Short-term, bond may still be weak, but longer-term there are many factors that likely will keep rates from rising too much. Also, emerging markets stocks, which have been overlooked for a decade or so now, present an interesting opportunity.
For our clients in discretionary portfolios, we’ll make these changes for you. For those who aren’t, we invite you to reach out to us to see what changes could be made.
A few non-investment related notes: First, Medicare enrollment is open now, so if this pertains to you, don’t forget to do it. Second, Required Minimum Distributions (RMDs) from IRAs were suspended for this year, so you do not need to take them. You can, though, so if you would like to do so, please contact us. Otherwise, we’ll assume that you do not wish to take money from your IRA. Keep in mind that this may affect your charitable giving, as many people like to make Qualified Charitable Distributions (QCDs) from their IRAs. Lastly, with the much higher cap on the standard deduction for income taxes, many people find that they are not making enough charitable contributions to itemize their deductions. A donor advised fund may be a great solution to that, as you can take advantage of itemized deductions without penalizing your favorite charities. You can call us about any of these ideas.
Meanwhile, all of us at Signature Wealth hope you have a Happy Thanksgiving, and look forward to hearing from you soon!
As always, past performance does not guarantee future results. Investing involves risk and you may incur a profit or loss regardless of strategy selected.