The Election: What Now for the Equity Market?

<b>Ryan Hanna</b> <br />Senior Vice President, <br />Senior Portfolio Manager <br />& Director of Equities

Ryan Hanna
Senior Vice President,
Senior Portfolio Manager
& Director of Equities

November 9, 2020

Economy & Investing


Time to re-evaluate your financial future? Our wealth management professionals can help.

Learn More

.
          
             
               

 

Get in touch

 

For more information about
our wealth management services, call

 

The Election

To say that 2020 has been an unusual year would be an understatement of epic proportion. Whether it is regarding COVID, its impact on our economy, small businesses and the health of our people, or the dramatic changes across our working and children’s learning environment, virtually nothing seems normal this year. Which brings us to the 2020 Presidential Election.  

Regardless of your political affiliation, just days removed from Election Day on November 3rd, people are frustrated asking who the winner will be, when will we know the results and what they should be doing with their investment portfolio to position for the outcome? It has been 20-years since the last contested election between then-Vice President Al Gore and George W. Bush, but it would appear we are on the cusp of another legal battle that may end up deciding the presidency. During the disputed election outcome in 2000, the S&P 500, which had already been declining prior to the election, fell another 7-8% until Al Gore conceded on December 13, 2000.

Leading up to election day, it was widely acknowledged that we might not immediately know who the President-elect would be given the number of mail-in ballots and the time it would take to tabulate the votes. The possibility for delay was understood, and in some regard, it is not a surprise that we have not gotten a quick decision. Typically, markets hate uncertainty. However, in this case, election gridlock and the possibility of a divided government has led to strong post-election gains. Why?   
 

Volatility and Gridlock: The Impact on Policy

Back in September and October, the CBOE Volatility Index (or the “VIX”) indicated elevated levels of volatility were likely throughout the month of November, so in many regards, the market had expected that the election would bring with it high-levels of uncertainty and greater volatility. In this regard, what has happened over the course of the past week was not really a surprise because the market had priced in "extra" volatility this month.  

In addition, given better results by the Republicans in both the Senate and House of Representatives, the balance of power in Washington D.C. has not shifted entirely towards one party or the other, at least not yet. In fact, the strong stock market performance seems to be responding to the likelihood of a divided government. In this case, radical policy changes are unlikely to be immediately implement regardless of who occupies the White House. Gridlock, and the traditional sense of “check-and-balances” has brought some level of relief to the market.  

Further, the possibility of another massive stimulus package proposed under House Speaker Nancy Pelosi, with estimates of $2 trillion dollars or more in additional funds, brought with it the possibility of greater inflationary pressures and higher interest rates. While the eventual outcome is still unclear, the likelihood that Republicans retain control of the Senate has tempered expectations for the more onerous tax policies that were anticipated under a Blue Wave scenario. Without the threat of Democratic control of all three branches of government, it is now more likely that interest rates may only rise moderately. This is not to say that more fiscal stimulus is not needed. It is in fact needed to support consumers and lower-income earners across a variety of service industries. With the unemployment rate hovering near 7%, job gains having slowed over the past ten weeks, and with the likelihood that we see more restrictions on businesses throughout the fall and winter as cases of COVID surge again, federal assistance is definitely needed.
 

Stay the Course: Own Enduring Quality

It is noteworthy that many investors allow politics and news headlines to influence their investment perspective, and regularly make decisions that are counterproductive to a well-crafted, thought-out, and diversified investment portfolio. Every four years, clients on both sides of the aisle ask us about how to reposition their portfolios, or whether they should raise (or lower) their stock market exposure because of the elected political party in office 

In our opinion, stock markets and stock prices tend to be forward looking and discount the probability of a variety of different outcomes well in advance. As the probability of a Joe Biden victory began to grow, many stocks affiliated with renewable fuels started to outperform the market. Other industries, like traditional energy or defense started to weaken. The market started to discount the possibility that greater resources would likely to be invested in renewable energy sources, and less in fossil fuels under a Democratic administration, and stock prices started to reflect that reality before it happened. Or that defense spending under a new administration could fall in the future, hence the impact on current stock prices. 

At Cambridge Trust, we take a long-term approach to stock ownership and emphasize enduring, high quality companies in our portfolios. Our equity strategies seek out companies that possess secular growth characteristics, which are likely to endure through a Democratic or Republican presidency. We do our own due diligence and internal research, focusing on companies that fit our “quality” criteria. Quality comes in many shapes and forms; a strong management team with a proven track-record of execution, sustainable, consistent, and profitable growth, financially strong balance sheet, low debt and above-average liquidity, or strong competitive positioning relative to peers. We believe quality is the backbone of a prudent and sustainable investment portfolio. Likewise, we actively avoid specific areas of the market, or certain types of companies that do not fit our definition of quality. We are constantly reassessing and adjusting the makeup of client portfolios and recognize that certain segments of the economy may perform better, or worse, under different fiscal and political regimes. It is inherent upon us to understand and evaluate a variety of different outcomes and how each may impact client portfolios. For these reasons, especially in times like these, we remain mindful of controlling individual positions sizes, sector weightings, factor exposure, geographic weightings, and the underlying composition of the broader portfolio. However, most roads lead back to the same place: identify and invest in enduring, high quality companies that can be held for the long-term.