U.S. Presidential election years are often characterized by increased market uncertainty – marred with questions around who will be leading the world’s largest economy and what policies they may put forth – and 2020 has certainly been a textbook example of this. This election was fought on a myriad of battlegrounds – racial equality, foreign relations (particularly with China), taxation, healthcare, and of course, the handling of the COVID-19 pandemic to name a few.
After a dramatic, drawn-out election (votes are technically still being counted and results contested) and a record-setting 150 million votes, it’s generally accepted that President-Elect Joseph R. Biden will be sitting in the Oval Office come January 20th. While the President-Elect prepares for the transition, acting President Trump, with the support of Republican lawmakers, has yet to concede as his administration explores legal options to overturn various state-run elections. U.S. Attorney General William Barr has also authorized a probe into possible election fraud.
All this to say that Joe Biden will likely be the 46th President of the United States and that storylines will continue over several more weeks.
Control of Senate is still in play
If that wasn’t complicated enough, the makeup of U.S. Congress (the makers of U.S. federal law) is still being decided and has implications on policy enactment. While it appears that the Democrats will retain control of the House of Representatives (representation is based on the population of each state), Senate (representation is equal among states) is likely to remain under Republican control. As mentioned in our previous post, radical policy shifts are unlikely given a balanced government.
However, with two run-off elections in Georgia (to be settled in January), we could see a 50/50 split in Senate between the Grand Old Party (GOP/Republicans) and the Democrats, with Vice-President-Elect Kamala Harris (who presides over Senate) potentially tilting control over to the blue team.
What’s happened since election day?
It’s certainly been a spectacle to behold, capturing the attention of the world for over a week. The running joke is that the news networks were the true winners of the election. All gags aside, what does all this mean from an investment standpoint?
Well, since election day, U.S. equities have rallied. The S&P 500 has once again climbed higher than pre-pandemic levels and to its highest point since early September. Having clarity on the next President probably helped a bit, but positive COVID-19 vaccine news (a vaccine developed by Pfizer and BioNTech proved to be 90% effective in its initial tests) amid reports of increasing case counts and additional pandemic-related restrictions worldwide, likely had more of an impact.
After a tease of things returning to normal following the positive vaccine development, logistical and distribution challenges cooled enthusiasm. Overall, U.S. stocks climbed higher as investors once again moved back into the giant technology companies (as the global economic recovery is expected to be slow), further adding to the trend that has already powered most of 2020’s gains.
So, the election has had relatively little impact on markets. Equally, the result and ongoing headlines has not materially disrupted our strategy. We remain positioned for the current environment that should persist over the next 12-to-18-months – ultra low interest rates, supportive fiscal policy, increased volatility, and slower growth as the global economy continues to recover.
It’s important to remember than MD portfolios are purpose-built to be invested over the longer term. While we employ tactical asset allocation to make shorter-term adjustments to our positioning (at this time, we still generally prefer equities over fixed income, North American and emerging market equities over international developed equities), even that is focused on the next 12-to-18 months and not just the next few days or weeks.
Thus, when looking through our largest U.S. equity holdings, many are positioned for success regardless of which party controls the various branches of the U.S. Government. There are many exciting businesses worth highlighting in our U.S. equity portfolios, but two of our largest positions are great examples of how we are positioned and worth a deeper look.
Microsoft – Uniquely positioned for regulatory changes and the pandemic environment
When looking through client portfolios, Microsoft is our largest U.S. equity holding. As of November 10th, it represents 5.3% of the MDPIM U.S. Equity Pool, 7.4% of the MD American Growth Fund, and 3.5% of the MD American Value Fund.
While the technology sector has performed tremendously over the past few years, highlighted by much of 2020, the sector is facing concerns around what a Democratic-led regulatory environment may look like. Amazon, Alphabet (Google), Apple, and Facebook are all being scrutinized for a variety of issues ranging from anti-competitive practices, price gouging, to privacy concerns. Microsoft has been left relatively out of the limelight when it comes to these issues.
Microsoft’s various businesses have either been relatively unaffected by the global pandemic, or in some cases, boosted. Workers will continue to use Microsoft products inside-or-out of the office, cloud computing services will continue to grow as companies shift their data storage needs to Microsoft datacenters, and gamers stuck indoors will continue to purchase Xbox consoles and games. All in all, regardless of what happens next from a political standpoint, we believe Microsoft is well positioned for continued success.
UnitedHealth Group – Offsetting increased corporate tax rates
Our second largest U.S. equity holding is UnitedHealth Group. As of November 10th, it represents a 3.2%, 3.4%, and 2.8% weight in the MDPIM U.S. Equity Pool, the MD American Growth Fund, and the MD American Value Fund respectively.
UnitedHealth Group engages in the provision of health care coverage, software, and data consultancy services, and, like Microsoft, is fairly well positioned for the coming years regardless of what happens to the healthcare system in the U.S.
Although a Democratic government could bring about an increase in corporate tax rates (President-Elect Biden could reverse some or all of the Trump administration’s corporate tax cuts), UnitedHealth Group could benefit from a further expansion of Medicaid and other subsidized healthcare coverage on the individual exchanges.
With the election sort of settled, the pandemic will continue to drive volatility
The way the ongoing recovery will play out will depend largely on pandemic developments. In the U.S. (and everywhere else), this will depend on future containment measures. With that said, the world is generally much better equipped to deal with the ongoing health crisis. We know more about what it is, how it’s transmitted, and how to protect people. Mask usage, social distancing, and limiting large gatherings seems to be the reasonable way to keep the numbers down and large parts of the economy up and running. Restrictions are now more focused relative to the broad shutdowns we experienced earlier in the year.
So, while we are not in the clear, we are certainly ahead of where we were in March and can make better predictions on the economy, corporate profits, and equity markets going forward. Regardless of who is President, we expect more people to be back at work in 12-to-18 months versus now. More parts of the economy will open as a result of better pandemic management (note this was a specific Biden/Harris campaign promise) and hopefully a breakthrough in vaccine or treatment development. All of this translates into greater profits in the future for many companies that are struggling or operating at partial capacity today.
In the interim, governments around the world are helping support workers that are not able to work (the next U.S. fiscal stimulus package is on its way – with the election almost done, hopefully the size and timing of the next package is determined soon). It’s not the perfect solution, but it helps to keep the economic machine running and buys time as we collectively continue to figure out the post-COVID-19 world.
To reiterate from our previous U.S. election post, “While we wait for the U.S. election to play out, it’s important to remember that it is a single event (albeit a big one). The complete picture that is our investment thesis is much larger and goes beyond one country and one event. Our strategy takes into consideration a much longer time frame and many other variables (geopolitics, economics, sector, and even individual investment analysis to name a few).” As stated earlier, there are many companies like Microsoft and UnitedHealth Group which have strong businesses that are positioned for success regardless of the political leanings of the day.
For more information about this post or your portfolio, please do not hesitate to contact your MD Advisor*.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec).
The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.