It remains to be seen who will occupy the White House in the New Year and the lack of a clear winner has amplified existing political uncertainty. While the presidency is receiving most of the attention, several House and Senate races are still being tabulated as well. These closely contested elections are taking longer to call due to an unprecedented volume of absentee ballots, and election rules in several hotly contested states that do not permit the time-consuming job of counting the votes to begin until Election Day.
No matter who ultimately wins the presidency, we anticipate the outcome of this election will have a significant impact on tax policy, the economy, and financial markets in the years ahead. Still, we firmly believe that it would be a mistake to base even a short-term investment strategy on a plan that necessitates accurately predicting which candidate will ultimately win the election, the policies proposed by the eventual winner, the ways in which Congress will modify those proposals throughout the legislative process, or the impact those new laws would have on the economy and financial markets.
The Ghost of Bush v. Gore?
The country’s final ballot count is expected to take days or weeks to complete. Even then, we would not rule out the possibility that the final result will be influenced by court decisions on election-related litigation. We have been here before. The 2000 presidential election between Republican George W. Bush and Democrat Al Gore was too close to call when the polls closed on Election Day. The winner wasn’t declared until six weeks later—following a time-consuming recount in Florida that was ultimately settled by the Supreme Court. Uncertainty ratcheted up financial-market volatility during that period of election limbo, with riskier asset classes broadly reacting negatively; U.S. equities, as measured by the S&P 500 Index, fell by 6.2% during the two-week period following November 4, 2000.
While the S&P 500 reacted strongly today, up 2.2% at the close, only time will tell how or when the 2020 election story ends. The consensus from economists and investors alike is that U.S. equity markets will sustain an elevated level of volatility in the near term.
No matter which presidential candidate assumes office next year, we expect their legislative agenda to be tempered before being put into practice. We also believe it is usually best that investors pay strict attention to the market fundamentals and ignore the politics. Accordingly, we are not making changes to portfolios based on the election’s outcome. This does not mean we intend to ignore the final result or the implications of future government decisions. As always, we will pay close attention to policy-driven fundamental changes and the financial-market imbalances they create, in terms of the risks and opportunities they present. At present, the combination of significant U.S. government-debt issuance (due to fiscal policy decisions) and the Federal Reserve’s accommodative monetary policy in the face of low inflation expectations (and that of other central banks around the globe) have impacted everything from credit markets and bank stocks, to the U.S. dollar’s primacy in global trade, and more. These government decisions have introduced longer-term structural changes to the global economy. We are tracking a range of investment opportunities and will continue to position portfolios based on economic and legislative developments.