The September volatility continued this week, though much of the losses for the month were recouped, and equities remain firmly in positive territory for the year. Economic data continues to surprise to the upside, with consumer confidence soaring, home prices rising, and the employment picture moving in the right direction. Offsetting the optimism, COVID cases are seeing an uptick in several hotspots in Europe and in the US, with governments responding with mixed measures to curb the spread. Meanwhile, policymakers in Washington continue to waste precious time on passing a meaningful stimulus package to support an economy still severely damaged by the virus, with some sectors of the economy on the ropes and lower-income and unemployed workers suffering the most.
Regarding the election, we see three potential likely outcomes with distinct implications for equity markets. Beginning with a Trump re-election and a continuation of a divided Congress, we expect more of the status quo. This would consist primarily of lower taxes and regulation, more gridlock and a lack of meaningful legislation, and likely some form of “skinny” fiscal stimulus to help support the economy through the ongoing crisis. In our view, this scenario would result in much the same of what we have seen the last few years: technology stocks as market leaders, lower rates, and a slow rebound. The second outcome, a Biden victory but a divided congress, would likely mirror a Trump victory in our first case, as no meaningful change to tax policy would occur and implementation of significant economic support would be limited. Similarly, we would expect markets to remain on a positive trajectory but with some nuanced changes to trade policy and specific beneficiaries in various sectors of the economy, with others facing headwinds. In the third scenario, with both a Biden win and a Democratic sweep in Congress, we would expect significant changes in fiscal policy as well as taxation. Under this outcome, our estimate is that interest rates would rise, equity market leadership would change to favor more cyclical stocks, and international and emerging markets could outperform in the short-term. Regardless of the outcome, we are confident that equity markets will climb higher over the next year as the economy continues to reopen and stabilize, Federal Reserve liquidity remains ample, unemployment declines, and corporate profits rebound from the shutdown. While it is easy to get excited about the race, we have to remain focused on the fundamentals that ultimately drive prices for risk assets.
We remain neutral in our positioning at this time, balancing near term risks from the election and fears of a second wave of the virus with the likelihood of better days ahead in the coming year. As long-term investors, we prioritize the 2-5 year time horizon over the next few months, meaning short term volatility is a secondary concern to us in reaching client’s goals. With that in mind, we are not making significant changes to portfolios leading into the election, but will be prepared to rapidly rebalance depending on what the outcome is. Given the assumption that the election will be close and hotly contested, we expect volatility to rise leading into and after November 3rd. This may provide opportunities to reallocate capital at better prices, and we stand ready to act. As always, we continue to remain extremely focused on monitoring unfolding market dynamics and reacting only when appropriate. Please feel free to call our office with any questions you may have.