Investing
U.S. Election: It’s close and not yet over
The election results are still rolling in. What do we know so far?
Our Top Market Takeaways for November 4, 2020.
Election update
It’s not over, and it’s close
The sun did in fact rise this morning, but the election is not over.
What do we know so far?
- The polls underestimated President Trump (again). So far, both candidates have won the states they were expected to win. Trump also secured victories in Florida and Ohio – key battlegrounds. Georgia, Michigan, Wisconsin, and Pennsylvania have yet to be called, and the outcome hinges on those results. As of the time of writing, it’s still a toss-up.
- Democrats could still eke out a majority in the Senate, but it seems unlikely. Democrats and Republicans are tied 47-47 in terms of Senate seats, but Republicans lead in five of the six races waiting to be called. The sixth seat will be decided in Georgia’s special election runoff, for which we won’t get results until January. The House seems bound to remain in Democrats’ control.
- If we wind up with a divided government, the prospects for a large fiscal stimulus bill (in the neighborhood of $2–$3 trillion) look less likely. Similarly, the possibility of tax policy changes and regulatory reforms decreases.
- Overnight, growth equities outperformed cyclicals. Futures for the tech-heavy Nasdaq 100 index rose while small caps fell. Interest rates declined. U.S. 10-year Treasury yields fell almost 14 bps, and the yield curve flattened. The U.S. dollar rallied, notably against the Chinese Renminbi, reflecting the risk that more flagrant trade tensions could be here to stay in the event of a Trump victory.
The price action seems to indicate that the market had built up some expectation for a large-scale fiscal stimulus package that now seems unlikely given the failure of a “Blue Wave” to materialize. Because growth would be more scarce in that outcome, the mega cap tech and tech-adjacent sectors have been outperforming so far…but we will caution that the market’s initial read on election outcomes has been spotty in recent years.
What hasn’t changed?
- We still expect a phase four fiscal relief bill at some point, but it could be at the lower end of our expectations (think $500 billion to $1 trillion). Furthermore, the prospect of meaningful government spending beyond that—in the form of infrastructure investment, for example—is diminished under an assumed divided government scenario. The U.S. economic recovery should march on, albeit at a more moderate pace.
- Investing in secular growth trends may still be one of the better games in town. A more modest cyclical growth impulse means that investments with above-market growth potential should continue to command a premium. Digital transformation remains pervasive, and U.S. and Emerging Markets are our preferred areas to find exposure. Healthcare Innovation will continue to change the way we treat and cure diseases, and experienced active managers seem most equipped to pick and choose leaders in the space. Sustainability remains a global trend driven by improving economics (e.g., lower cost of renewable energy production) and global government spending (particularly from Europe and China), and long-term investors might consider an election-based pullback as an entry opportunity.
- Yields are likely to remain low for longer, highlighting the necessity for investors to expand their toolkits for generating income. Our constructive view on the upper tier portion of the U.S. high yield market remains intact, and we also see fertile ground for credit pickers in municipal bonds and certain short-dated emerging market corporate bonds. Note that we’re not calling for yields to drop meaningfully—on the debt side of personal balance sheets, we still stand behind the suggestion to fix interest rates on floating rate liabilities.
- With a Trump victory or a Biden victory with a divided Congress, expect the status quo for taxes. This bolsters our preferential view for the United States versus other geographies, and should relieve the market of fears of headwinds for corporate profitability. Similarly, if President Trump ends up winning, prospects for tighter regulations in sectors like Financials and traditional Energy have all but dissolved. Certain banks and energy companies could see a relief rally, but we’re choosy about where we would add exposure. Secular growth has been the real “Trump trade” all along.
When will we know more?
A few media outlets called Arizona for Biden earlier today. Georgia and Wisconsin expect to report results by the end of Wednesday, while Nevada will be back with updates on Thursday. If Biden manages to win each of those states, he would reach the 270 Electoral College votes needed to clinch victory – even if he loses Michigan, North Carolina and Pennsylvania. Michigan is also expected to report results by Wednesday night, while North Carolina and Pennsylvania may not be known for a few more days.
Trump’s potential path to victory is likely to include Alaska (assumed to be a lock, although results aren’t finalized), plus Georgia, North Carolina, Pennsylvania and either Michigan or Wisconsin.
Point being, we may not know until next week. The determination of who controls the Senate may come down to Georgia’s special election runoff, which will remain an unknown until the new year.
Also, the probability of a “contested” election is higher in our minds than it was yesterday. However, what seems to be clearer is that broad risk markets are comfortable with the prospects of either presidential candidate eventually winning, and we would be likely buyers on protracted weakness caused by a contested election in the court system.
All in all, we reiterate our elections season mantra: The next few days could remain volatile, but it’s crucial for investors to see past the noise, stay invested and focus on their long-term financial plans. We’ll be back with more insights as developments unfold.
All market and economic data as of November 2020 and sourced from Bloomberg and FactSet unless otherwise stated.
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