As expected, the outcome remained unsettled in the days following the election as votes were still being counted in key battleground territories. As of this writing, Joe Biden was ahead of incumbent President Donald Trump in the contentious presidential race.

  • The post-election stock market rally proves investors care more about the economy than politics.
  • Depending on election outcome, the stage could be set for a confrontational policy regime that can affect bonds in the short and intermediate terms.
  • Election consequences will be part of the market for a while, but economic data will command more attention.

The 2020 U.S. election certainly captured the attention of the world. The captivation started well before November, as we intensely watched the candidates navigate a country coping with the effects of a pandemic. It culminated on Election Day and the days after, as we stayed glued to our screens watching the state totals come in. A week later, anticipation still has not faded and we now look forward to what will happen next.

Despite its uniqueness, this year’s presidential election was not unlike those that preceded it in that it presented many reminders. Not just several reminders to vote. We were also reminded of how our lives were impacted by the events of this year. Americans took these experiences with them as they cast their votes by mail, at ballot collection sites, and in polling places this voting season.

Surely, emotions run high when voting and while watching the political process unfold.

It can also be difficult to keep emotions in check when it comes to investing. In this case, the reminder is to base investment decisions on your goals, time horizon, and risk tolerance. Also, remember: Janney offers information and advice to give you the perspective and guidance needed to make these decisions.

As we move beyond the election, keep in mind those who have supported you in making financial decisions. This includes your Financial Advisor, who may have shed light on your investment portfolio during times of market volatility. Financial professionals are here for you now, in the aftermath of an election that may produce new economic conditions.

For the time being, read this special issue of the Janney Investment Strategy Group’s Investment Perspectives, which focuses on stocks, interest rates, and fixed-income securities post-election.

What will the election outcome mean for stocks? - Mark Luschini

The outcome of the 2020 presidential election was unresolved at the time of this writing late November 5. 

Additionally, and perhaps more importantly, the same was true for the Senate races. As of November 5, it appeared that Republicans maintained their majority. However, not all the votes have been registered in states where the results are close. In Georgia, two Republican Senate seats are in jeopardy should either fail to receive 50% of the votes necessary to avoid a runoff that would not take place until January!

It’s the Economy

One might think the uncertainty created by the indecision would pressure the stock market as the policies of either party could influence taxes, regulation, and government spending, in a potentially profound way. Instead, the market’s rally seems to be signaling what we have repeated in our prose for years, that what matters more to stocks is economics rather than politics. On that, the news has certainly been good, and should generally be expected to remain so regardless of the electoral outcome.

Certainly, we do not want to diminish the impact of election. The policies of Joe Biden as it related to corporate and individual taxes alone were largely considered market-unfriendly. In addition, certain industries such as Energy and Health Care were likely to be impacted more directly than others. However, his less-hawkish approach to foreign policy might be considered a benefit as it could de-escalate trade tensions, which in turn, helps to reduce global uncertainty.

If re-elected, President Trump, on the other hand, would lean toward retaining if not advancing his more accommodative tax and regulatory policies, but might strike a less-conciliatory tone in his approach to affairs with China, and even some allies’, trade policies. Clearly, there are other agenda items that could influence the stock market at the margin, but the composition of Congress may act as an arbiter of any of its enactment predicated upon the ultimate partisan divide.

Expect Positive Growth Ahead

In the meantime, the economy is bouncing back from the pandemic-induced collapse, and continues to elicit signs that its progress is exceedingly likely to persist. Arguably, the path of the coronavirus may dictate safety standards that could undermine its pace, even if those imposed are less draconian than the measures in place earlier this year. Since there seems to be no imminent appetite for a full return to an economic lockdown, the economy should grow at a pace sufficient to generate new jobs and induce consumption, critical ingredients to a self-sustaining expansion.

Should a Phase 4 fiscal package be put forward in the next few months, an expectation we hold as a base case, the economy should get an incremental tailwind and accelerate the recovery toward filling the output gap caused by the deep, albeit brief, recession. Of course, a commercial vaccination that could be made widely available in the second half of next year (according to some experts), would perhaps further boost growth to a pace well above trend.

Collectively, we expect the economy to continue to grow in a positive fashion and the odds that favor a new fiscal stimulus and therapeutic solution in the near future only brighten those prospects. China is growing and has fully recovered its aggregate output, and while Europe has experienced a coronavirus-related setback that will hurt fourth-quarter growth, policymakers have already come together to tease a new round of stimulus that is all but certain.

Staying the Course

While investors should be prepared for volatility if news breaks in an unexpected direction regarding the election, coronavirus, or geopolitical relations, we believe the prudent course is to stay fully invested in stocks proportionate to one’s long-term goals.

Pro-growth sectors like Materials, Industrials, Technology and Consumer Discretionary warrant favor, as do emerging market equities.

The election has consequences, some of which may be felt immediately and some over a lengthier course of time. For investors with a meaningful investable time horizon, the state of the broad, complex, and deep U.S. economy matters perhaps more.

The Post-Election Interest Rate Landscape - Guy LeBas

Financial markets found themselves wrapped around the little finger of political trends for the last four years, and it is hard to get away from the feeling they always will be. 

However, the reality is private sector spending and private capital flows are roughly eight times that of the public sector. Policy does matter for interest rates, credit markets, and especially munis, but it is far from the only and biggest thing that matters.

Today, organic economic growth is on the upswing from a public-health triggered recession. The recovery will be uneven, but the U.S. economy sits at the beginning of a cycle of economic growth and credit, not the end. Policy may partially determine the timing of that cycle, but over time, we nonetheless expect interest rates to move gradually higher and risk assets to perform well as organic economic activity edges higher.

Short- and Intermediate-Term Effects of Election Outcome

Market philosophy aside, the political events of early November do have implications for short- and long-term policy. At the time of authorship, vote counts are not final, and legal maneuverings are just beginning, but it appears that voters elected Joe Biden president and re-elected a Republican Senate majority. That outcome sets the stage for a confrontational policy regime, and bonds care for two major reasons: Short-term stimulus hopes and intermediate-term infrastructure spending.

Throughout the fall, policymakers haggled over the necessity and contents of a follow-up fiscal stimulus package. In general, the House was in favor of extensive stimulus (including several hundred billions of dollars in state and local government aid), the Senate was in favor of a narrow stimulus, and the White House intermediated. Going forward, a Republican Senate has game theory incentive to “starve” a Biden presidency by limiting stimulus.

That said, Sen. Mitch McConnell has been supportive in talking up stimulus prospects during the Lame-Duck Congress session. A large fiscal stimulus package has the chance to pull forward economic growth and inflation (possibly spawning a self-sustaining spiral), and will definitely add to Treasury supply, but an opposition Senate reduces those odds.

Similarly, a confrontational Senate reduces the chances of a large infrastructure-spending package. The Biden campaign proposed $750 billion of spending on various infrastructure-related issues; spending which would be likely financed with long-term Treasury bond issuance. Even more so than with the stimulus, a Republican-led Senate is unlikely to support such a package, thereby reducing expectations of growth and inflation in the short run and Treasury supply as well.

Onward and Down or Up?

The key point for the interest rate markets is that pulled-forward growth/inflation expectations, plus more Treasury supply, would bias long-term interest rates upward. As financial markets continue to price in the electoral outcome, they are also pricing in a reduced chance of these aforementioned policies. The clear effect for the interest rate markets is that a Biden presidency and Republican-led Senate will pull long-term yields downward, all else equal.

But, all else is not equal. The U.S. economy is on the upswing after a public-health induced severe recession. Even with limited fiscal support, the trends for economic growth and inflation are upward. In that respect, while the lack of fiscal stimulus will delay the move towards higher interest rates, a gradual move up in 2021 and beyond remains the most likely long-term interest rate market theme.

When, Not If - Greg Drahuschak

October began with hope that the S&P 500 could challenge its all-time high of 3,588. In October’s Investment Perspectives, we mentioned that it probably is just as easy to make an argument for a 10% pullback as it is for the market rising 10%. Faced with a resurgence in virus infections, as well as election uncertainties, the S&P 500 fell below its 50-day moving average and drifted down to potential support that left it roughly 10% from its all-time high.

November Stock Performance

Pre-election November trading, however, overcame the October weakness as the S&P 500 surpassed initial technical resistance around 3,400 and eventually topped 3,500, as the market was relieved that its worst election fears would not be realized. From the November 2 close through November 5, the S&P 500 gained 6.6%.

In the previous 17 presidential elections years, the S&P 500 ended November higher in nine years (52.94%) compared with all Novembers since 1949, when it was up in 48 of the 70 possible years (68.57%). By the end of the year following an election year, the S&P 500 was higher 13 times.

Looking Out for Positive Economic Data

Election consequences will be part of the market for a time, but economic data, which largely have been on a positive trajectory, will command more attention.

For example, the ISM Index that measures manufacturing reached its highest level since November 2018 nearly 43% above its April 2020 low with its key components like new orders, production, employment, and new export orders all higher. Bolstered by low mortgage rates and high demand, housing was a notably positive economic driver. Small business sentiment matched its pre-pandemic high.

The market could be choppy this month and through the end of 2020 as traders focus on several key elements.

  • The still unsettled political configuration of the Senate could affect the market.
  • The vaccine developed by Pfizer (PFE) and BioNTech (BNTX) proving to be more than 90% effective was critical in terms of virus containment and potential economic activity.
  • Earnings expectations will be significant. Following the virus-induced low, the 2021 S&P 500 earnings estimate has moved up 2.8% from the low, as earnings reported by the end of October were 19.5% more than expected. Notably higher equity prices, however, need the 2021 earnings estimate to rebound more than it has. This might require a stimulus plan being enacted fairly soon. Both political parties appear to favor an infrastructure program, which if enacted, could boost earnings expectations.
  • The Federal Reserve remains a key factor that appears to be solidly supportive of the equity market. There does not appear to be a significant chance the Fed will back away from its highly accommodative credit policy, and it openly has stated it is prepared to provide even more support if needed.

Before the vaccine news, we thought it was only a matter of only when, not if, regarding a new market high. The “when” became “now” on the heels of the news.

Technical factors, however, are likely to play a short-term market role, as the S&P 500 moved into an overbought condition. Nonetheless, new highs are likely as we move into 2021.

The information herein is for informative purposes only and in no event should be construed as a representation by us or as an offer to sell, or solicitation of an offer to buy any securities. The factual information given herein is taken from sources that we believe to be reliable, but is not guaranteed by us as to accuracy or completeness. Charts and graphs are provided for illustrative purposes. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors.

The concepts illustrated here have legal, accounting, and tax implications. Neither Janney Montgomery Scott LLC nor its Financial Advisors give tax, legal, or accounting advice. Please consult with the appropriate professional for advice concerning your particular circumstances. Past performance is not an indication or guarantee of future results. There are no guarantees that any investment or investment strategy will meet its objectives or that an investment can avoid losses. It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available through investable instruments based on that index. A client’s investment results are reduced by advisory fees and transaction costs and other expenses.

Employees of Janney Montgomery Scott LLC or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed within. From time to time, Janney Montgomery Scott LLC and/or one or more of its employees may have a position in the securities discussed herein.

About the authors

Mark Luschini

Chief Investment Strategist, President and Chief Investment Officer, Janney Capital Management

Read more from Mark Luschini

Guy LeBas

Director, Custom Fixed Income Solutions

Read more from Guy LeBas

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