Market Update - AssetMark

November 5, 2020

Jerry Chafkin

US Market Perspectives: Back to the Virus

Jerry Chafkin

Chief Investment Officer

AssetMark, Inc.

At the time I am writing these post-election thoughts, many votes remain to be counted and results from several key swing states are still unknown. Having said this, it appears likely that Joe Biden will win the White House and Republicans will retain control of the Senate. Investors, like all voters, probably have strong emotions around the outcome of this election. The good news is that the worst-case scenario of elections disrupted by violence or intimidation did not occur. American democracy appears to remain strong with record voter turnout. More good news is that regardless of investors’ political leanings, their worst fears are unlikely to be realized. While Trump supporters will be disappointed if he loses the White House, they can take comfort that a Republican-controlled Senate will block any significant increase in corporate or personal taxes. Biden supporters will be disappointed that, without the support of a Democrat-controlled Senate, he will be unlikely to achieve sweeping change in environmental, social justice, minimum wage schools and social safety net programs however, Biden supporters can take comfort that there are some policy changes that can be achieved through Executive Order and the setting of high-level policies and priorities for the range of government departments and agencies.

Beyond the above comments on how to help investors manage through their political emotions, we would offer the following investment implications in connection with what currently appears to be the likely scenario of a divided government:

  • Uncertainty related to the election will be short-lived. Although Donald Trump has declared victory and promised to challenge state election results in the courts, it is not obvious what the basis for any legal challenge to the election results might be. Once the swing state election results have certified their vote tallies, which should be by the end of November, there will be less uncertainty. Market volatility should subside, which should generally be beneficial for stock prices.
  • Divided government is the norm for the United States. More often than not, no single political party controls both branches of Congress and the White House. Nevertheless, during these periods, the economy manages to grow and the stock market delivers positive returns. Divided government can lead to “gridlock,” but the stock market often likes gridlock because it provides greater certainty that tomorrow’s regulatory and tax policies are likely to remain materially unchanged. While a Biden administration will likely enforce regulations that are already “on the books” and support a “greener” interpretation of existing laws, without the support of a Democrat-controlled Congress, industry is unlikely to see significant new regulations.
  • Less trade tension is good for the global economy. The arena where a US President can have the greatest impact, even without a majority in Congress, is foreign affairs. Given this we should not be surprised if a Biden administration proposes fewer—if any—tariffs, re-enters the Paris climate accord and tries to negotiate a new agreement with Iran, potentially leading to lifting sanctions on its oil exports.
  • Reduced uncertainty is good for business. Trump’s was a volatile presidency with a lot of “headline risk” in connection with what country, company or person he might attack via tweet or speech on any given day. Reduced uncertainty and headline risk is generally good for companies as it allows them to make and implement long-term plans.
  • Less trade tension should benefit international markets. Between the global pandemic and trade wars that hurt export-dependent economies more than the United States, the US dollar has been a “safe harbor” for investors globally and has steadily strengthened. A less-hostile trade environment may weaken the dollar and benefit export-dependent economies such as emerging markets and select international developed markets. It should also provide a tailwind benefitting returns on all non-dollar assets held by US investors.
  • Certain investment styles have tended to do well following Presidential elections. Small-cap, value and high-beta stock styles have historically tended to outperform the broader stock market following Presidential elections. In an analysis performed by Damian Handzy, the Chief Commercial Officer of Style Analytics, in seven of the past nine presidential elections – regardless of whether or not the incumbent was re-elected and regardless of whether the newly elected or re-elected president was a Democrat or a Republican – these investment styles outperformed the broad market. There is a certain logic to why this would be the case, as newly elected presidents tend to advocate for economic stimulus promoting economic growth and a “risk-on” market dynamic.
  • Absent the expectation of big policy changes, investor sentiment will likely return to focusing on the global pandemic. If Democrats fail to flip control of the Senate, the risk of sweeping policy change will be off the table and investors’ market outlook should once again focus on the virus, the impact of associated lockdowns, and the promise and timing of a vaccine. Biden’s experience with addressing an epidemic and his consistent messaging of relying on the advice of scientists and medical experts may increase public confidence in any vaccine once it is developed, and may speed or smooth the roll-out of the vaccine and its adoption by the American public.
  • Until there is a broadly available and adopted vaccine, current market trends are likely to continue. Current market themes are consistent with defensive, mid-pandemic investing – US large cap, high quality, growth stocks. Until the end of the pandemic is in sight, these market themes are likely to continue, regardless of who is in the White House. When investors start to anticipate a post-pandemic world, their preferences are likely to become more risk-seeking—focused on value, small-cap and high-beta stock styles. Because the timing of when the market will shift from mid-pandemic to post-pandemic psychology is unknowable, global and style-diversified portfolios are recommended and probably more relevant today than they have been generally across time.

Beyond recommending diversification (and perhaps an alcoholic beverage), our advice to investors is patience. The impact of changing government policies is not like a light switch that suddenly turns things on and off. Government policies generate investment themes that tend to play out over time, allowing investors and their advisors to reposition portfolios as they learn more.

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C20-16923 | 11/2020 | EXP 11/30/2021

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