My Fellow Americans, Our Long National Nightmare is Over...
November 2, 2020
By Mike Moreland
VP - Investments
Those of us of a certain age recognize this phrase from President Gerald Ford’s inaugural address following Richard Nixon’s resignation in disgrace. The context today is a little lighter. By the time this note is published, we’ll be within hours of the end of the 2020 political races. If we are lucky – a big if -- our mailboxes will be relatively empty, advertising will again entice us to enjoy the finer things in life, and robocalls will concentrate on our cars’ extended warranties. Whomever you support, we should all be thankful if life returns to normal on November 4…or what passes for normal this year.
So what happens next? How will the election affect the financial markets? These topics lead all others in the inquiries our advisors and investment staff receive. The answer really goes to the foundation of our investment philosophy: we believe the underlying strengths of the American economy and its citizens will enable us to overcome the political and cyclical ups-and-downs we enjoy (or endure). Whether our leaders are statesmen (and women) or knaves – or both! – we will be fine if we are free to participate in a responsible, capitalist, representative society. American exceptionalism has its detractors, but our (admittedly imperfect) way of life has helped build a better world.
Economic Fundamentals V. Political Events
But to the question at hand. The chart below shows annual returns of the S&P 500 back to its inception in the mid-1920s. Can you see a pattern related to the party in power? Neither can I. How about market behavior around economic cycles? Absolutely. The short story is that financial markets are much more responsive to economic fundamentals than political events. The two are not mutually exclusive, of course, but the bottom line is that the party in power rarely has the political capital to fundamentally transform our economic and social systems. The Founding Fathers made sure of that.
After November 3rd
That said, there will be winners and losers under the next Administration. Matthew Bartolini of State Street Global Advisors, one of the world’s largest money managers, identifies five policy debates that will likely affect capital markets – taxes, trade and foreign policy, clean energy/infrastructure, health care, and technology/antitrust. We’re all familiar with the framework of these, and we’ll elaborate in notes after the dust settles.
The key to the outlook will be the Senate. A clean sweep by the Democrat party of Congress and the presidency will enable more policy changes, sooner. A divided government – however it plays out – will force compromise and provide a smoother (but noisier!) path forward. We can work with that.
The near term worst case scenario is an uncertain outcome. The old saw that ‘markets climb a wall of worry’ is true, but the fact is markets want some idea of 1) the height of the wall, and 2) the view from its top. The longer vote-counting drags on, the more risk appetites will fade. Volatility will rise, likely tilted to the downside. Headline risk will turn into real risk.
Things to Keep in Mind
To close, like us, you’ve been inundated with predictions of what will take place after November 3 and the ramifications to the financial markets. There are two salient points to keep in mind. First, no one knows how events will unfold. Second, more important, our nation is strong. We have overcome wars, depressions, and pandemics. We will do so again. Cast your vote, and then continue to work toward the common good.