(Photo source: Joshua Woroniecki)
Does it matter? The 2020 U.S. presidential election has been a drawn out, acrimonious affair for everyone, no matter their political orientation. Interestingly, a study from the American Psychological Association revealed that 68% of U.S. adults identified the 2020 presidential election as a source of stress.
Tensions continue and the ‘official’ outcome may not be announced for some time. Legal challenges are already underway. The post-election fracas may lead to heightened volatility and gyrations in the stock market, however despite this, investors have historically enjoyed a “presidential honeymoon” lasting 100 days or so.
The politics of change From a longer-term perspective, the balance of power in government is constantly changing, and we see little reason to believe that it will not remain that way. But history tells us the stock market usually goes up, irrespective of who is in power:
S&P 500 Average Annual Performance, 1933 - 2019
Source: Strategas Research.2
(The above returns exclude 2001-2002, as power in the Senate changed hands three times in that period).
Annals have been written on how certain election outcomes might result in different policies for stimulus, taxation, regulation (or deregulation), deficit spending, et cetera. However, no policy directive is assured, and a policy proposed often looks a lot different than a policy enacted. Politicians have a long history of over-promising and under delivering, Obamacare being a recent example.
The changes that matter most often take years to complete. In 2017, when President Trump was inaugurated, the administration had “The Ryan Blueprint” for lowering corporate tax rates. It took over a year to push through the proposed changes. Ronald Reagan focused much of his 1980 campaign against Jimmy Carter on tax reform, but his signature Tax Reform Act was not signed into law until 1986. Change usually happens slowly.
Perhaps the newly elected president will set in motion policies that will slow the pandemic, fix the crumbling infrastructure, and put millions of Americans back to work. We shall have to wait and see. The United States of America has a great record of bridging the country’s internal differences.
New economies If one thing is certain, it is that many companies will have to prepare for future global pandemics by investing more in automation, robotics, and/or artificial intelligence. Supply chains will be brought closer to end consumer markets, and at the core of these initiatives will be technological connectivity and digitalisation, (perhaps our most important TEAM global megatrend).
Powerful technology trends like 5G, AI and Machine Learning are not new, however in recent years, these sweeping technological innovations have been growing at an exponential pace, creating a long list of economic winners and losers. At TEAM, our over-riding desire is to identify the trends that will shape the economic and financial market landscape of the future, and to position client assets so that they benefit from these changes.
Listening to the right noises Our advice is to ignore the noise and uncertainties of politics, and to focus upon what can be controlled. Too often, investors confuse their political beliefs with their convictions about economic and investment outcomes. Feeling negative about the election result can lead to feeling despondent about the country’s economic prospects, which may trigger a desire to sell. This can result in poor outcomes.
Financial markets anticipate, and react to, changes in financial trends, such as the path of interest rates, long-term earnings prospects for companies, and the trajectory of economic growth. Political machinations create plenty of noise, but are less significant.
Market tailwinds Federal Reserve Chairman Jerome Powell reiterated on Thursday 5th November that his Open Market Committee colleagues intend to hold interest rates close to 0%, and to maintain the Fed’s “easy” monetary policy for years to come. This obviously has negative consequences for the U.S. Dollar, and the currency did indeed fall to its two-year low. Forthcoming trillion-dollar stimulus plans of both Republicans and Democrats will likely result in additional downward pressure.
On the other hand, these very measures might prove to be tailwinds for the stock market for the foreseeable future.
A weak U.S. dollar means goods produced in the US become more competitive in the global marketplace, which is particularly good news for thriving global businesses of the US technology companies. Goldman Sachs estimated overseas sales accounted for circa 30% of aggregate S&P500 revenues in 2019. Further, as imports from foreign countries become more expensive, Americans are likely to favour domestic products over imported ones.
Embracing the gridlock It is a standard trope that the market ‘hates uncertainty’, and the outcome of this election was about as uncertain as it gets. It would seem however that while Wall Street hates uncertainty, it loves gridlock in Washington, D.C. The expected “blue wave” of a Presidential and Senate clean sweep for the Democrats did not materialize. Assuming Joe Biden is confirmed as President, he is less likely be pulled to the “hard” left because, as we write, it looks as if the Republicans will retain control of the Senate, whilst the Democrats will retain control of the House, albeit with a diminished majority.
This split makes it more difficult for extreme legislative interference on issues like healthcare, taxes and even regulation of technology companies. Importantly for investors, Corporate Tax increases also look much less likely.
We would also point out that a lot of Republican Senators will be seeking re-election in 2022. We might therefore be seeing this movie again two years from now, but in the short terms at least, taxes will likely stay stable.
With a divided government, we can also expect minimal health care reform, fewer anti-trust and regulatory actions against ‘Big Tech’, and little to no reduction in defense spending. A continuation of government spending also looks nailed on, given the resumption of economic stimulus brought in the combat the impact of Covid.
It’s the economy stupid Given the strange manner in which the election unfolded, the dramatic rally in the US stock market might look a little precipitous. However, given that there seems to be little prospect of major changes to the Congressional power makeup, traders and investors can now turn their attention back to earnings and the economy. From an economic standpoint, recent ISM manufacturing and payroll numbers point are indicative of underlying strength. In October, 365,000 private sector jobs were created, consumer spending increased for the fifth-consecutive month, whilst US GDP rose at an annual 33.1% rate in the third quarter, which was the biggest rise in GDP ever recorded.
Whilst the U.S. economy is recovering however, there are certain pockets of corporate America which are surging. Company earnings have been strong, with unprecedented 3rd quarter US GDP growth, and forecasts indicating a strong 4th quarter.
FactSet recently reported that more than 60% of S&P 500 companies have announced results from the latest quarter. Over 80% of these companies beat analysts’ estimates for both earnings and sales. The average earnings surprise was 19.3% above expectations. The average earnings decline was only 9.8%, which is better than analysts’ forecasts, with expectations of a 21.1% drop for the third quarter.
TEAM expect this trend to continue well into the first quarter of 2021, and with base comparisons against COVID impacted Q1 2019 numbers, we believe these upside shocks will continue.
There are certain sectors which are continuing to thrive in the post-COVID, ‘new-normal’, economy. Leading companies in E-commerce, cloud computing, digital advertising and artificial intelligence have all been major beneficiaries of the structural transition to digital for consumers, and enterprise for businesses, that has been accelerated by the virus. We at TEAM have maintained a substantial allocation to these companies throughout 2020.
Finally, it is also clear that there is a lot of uninvested cash sitting on the sidelines. The U.S. Federal Reserve recently reported over $3.4 trillion in savings and deposit accounts, up from $2.25 trillion at the start of 2020. The surge in the market in the last week might be indicative that some of that cash is finally moving back into the market.
Ultimately, the substantial moves which occur in markets are due to major economic trends, rather than short term changes in political leadership. In a world of zero interest rates, limited inflationary pressure, and accommodative central bank policies, the US continues to shine against most international competitors in a world of generally low growth.
7th November 2020.