The Election is Behind Us So Now What?
The dust has mostly settled on what was a long and contentious presidential election campaign. What remains to be seen is if there will be a unified or divided government come January 2021, depending upon the outcome of two Senate run-off races in Georgia.
No Blue Wave in Washington
Regardless of what happens in Georgia, the election did not produce a “blue wave.” Perhaps that explains the strong market in the days following the election, even though positive earnings announcements and extremely promising news on the vaccine front undoubtedly played a part. Markets tend to favor a divided Washington, D.C. over having one party hold all the power. So, what do the election results mean for the economy and markets going forward?
The Prospect of Additional Stimulus
For one, transformative policy changes are unlikely. While there is a chance of a smaller fiscal stimulus bill passing during the ‘lame duck’ session of Congress, any more significant stimulus will have to wait until after the inauguration. There does seem to be bipartisan agreement that additional help for the U.S. economy is needed as the recent spike of Coronavirus cases nationwide has caused some states to backtrack in their re-opening. However, there is a lack of consensus between the Republicans and Democrats as to the size and composition of that stimulus. Furthermore, a divided government could temper more aggressive changes to tax law and regulations that might have otherwise occurred with a “blue wave.”
Will a Vaccine Extend and Broaden the Stock Rally?
Less drastic policy shifts bode well for stocks headed into 2021. A continuation of the pro-business Trump policies of lower taxes and less regulation may be good for corporate earnings, which ultimately drive markets. And, a Biden presidency may mean less uncertainty on trade and a renewed effort to combat the Coronavirus, aided by the increased probability of viable vaccines becoming broadly available given the recent announcements by Pfizer and Moderna. The availability of a vaccine or vaccines would go a long way to getting the U.S. economy back to normal, which could also mean a broadening out of the current stock market rally, which has mostly favored growth-oriented companies and technology stocks in particular. In the last few weeks, small and value-oriented companies have beaten their large and growth counterparts by decent margins, perhaps indicating that the tide may finally be turning in favor of those beaten up areas of the market.
Opportunity for Bonds even with Low-Interest Rates
As for bonds, after a brief rise in Treasury yields right around the election, fixed income markets settled down as it became more apparent that there would be no Democratic sweep leading to larger stimulus and more borrowing by the Federal government. Interest rates are likely to remain low for quite some time as the U.S. economy continues to recover. Even with low rates, there is still an opportunity for solid returns for bonds as the Federal Reserve remains an active participant in fixed income markets through quantitative easing.
Impact on Investors
What does all of this mean for investors? Leading up to the election, we cautioned against allowing one’s political persuasions to influence investment strategy. That advice, yet again, held true as stocks rallied despite the concerns of some that a Biden victory would bode poorly for the market. While there is still quite a bit of uncertainty politically, economically, and concerning the virus, maintaining investment discipline remains key. Staying diversified and rebalancing when the opportunity arises is important as is making sure you have an allocation to stocks and bonds that helps you achieve your goals and balances out your tolerance for risk.
As a member of the Investment Committee, Matt is instrumental in developing BDF’s overall investment strategy. Matt received his Bachelor of Science in Economics with concentrations in accounting and finance from the Wharton School of the University of Pennsylvania and his MBA in finance and strategic management from the University of Chicago Booth School of Business.