Stocks lurched higher this week, as the US election passed without significant disruptions and the peaceful outcome allowed investors to breath a sigh of relief. Led by technology shares, markets wiped out the losses of the last several weeks and pushed towards all-time highs. Meanwhile, bonds had a sharp reversal, with interest rates plummeting on the likelihood of lower borrowing ahead from a mixed Congress and possible headwinds on growth and inflation. On the economic front, manufacturing expanded at the fastest pace in two years as companies rebuild inventories and consumers continue to open their wallets for goods. Meanwhile, the services economy remains fragile, clocking in the slowest growth in five months, as demand is still lackluster with COVID taking it’s toll on American’s desire to venture out. Reflecting the ongoing pain in labor markets, more Americans than expected filed for unemployment benefits and those already on claims continued to decrease marginally. Providing some relief to the employment picture, Americans are purportedly sitting on over $2.5 trillion in cash savings which, if unleashed in spending, would provide a significant boost to growth in the coming quarters ahead.
The election’s outcome has reduced a clear driver of uncertainty over the past several months, and markets quickly adjusted to the potential implications around the economy, interest rates, taxation, and foreign policy. With the senate likely remaining in GOP hands and the house under Democrat’s control, the potential for a “Blue Wave” is now eliminated no matter the outcome of the Presidential race. While the Presidential election is favoring a Biden win at this time, it remains to be seen what the final outcome is. However, the ramifications of a split Congress and likely Biden White House are significant. First, fiscal support measures to help the millions of businesses and consumers who continue to struggle from the COVID crisis remain critical at this juncture, and now legislators can get back to the business of drafting a new round of aid. Any spending will now likely be less than had been anticipated from a Democratic sweep, but hopefully enough to keep the economy progressing from the shutdown earlier this year. Perhaps the most significant outcome will be the continuation of the 2018 tax cuts and no major breakthroughs on healthcare legislation. Foreign policy will also likely see a significant change in tone, with the aggressive, unilateral approach being replaced by a more consensus-building, multilateral perspective. While not receiving as much attention lately, the Federal Reserve continues to provide significant support measures as well, by keeping interest rates at zero and buying billions in bonds every month. Overall, the election’s completion and elimination of some tail risks along with stimulative monetary policy measures shifts our assessment of the investment landscape to a more pro-risk tone. Looking ahead, the success of a potential COVID vaccine and treatment options will be the next major hurdle to overcome to bounce back from the 2020 recession and return corporate profitability to it’s growth trajectory.
At this time, we are repositioning portfolios now that election volatility is mostly behind us and a clearer path forward can be seen. Using the cash build-up leading into the election, we have added to risk assets, particularly in the technology and healthcare space, both of which should benefit from a continued low-tax environment and lack of regulation. Additionally, the suspected easing in trade policy could act as a tailwind to international equities, particularly in emerging market economies in Asia, and we have added exposure there as well. The drop in interest rates following the election and perceived likelihood of lower rates for longer, has made us less cautious on holding longer dated US government bonds as well as corporate and high yield fixed income securities. The recent rotation into smaller company stocks as well as “value” and dividend payers is being unwound marginally, as the preference for growth and a continuation of leadership from the same winners of the past several years seems likely. 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.