Volatility in the markets and speculation among investors are both ramping up in the final stretch to the U.S. presidential election. If you're an investor, we recommend that you brace for more stock market volatility in the months to come as speculation is bound to run rampant over the next few weeks.
We're already seeing retail investors jump in-and-out of markets in an effort to try and cash in on the latest story lines. Many are asking who will win. Some are wondering about the new government's composition — will the Republicans maintain control of the Senate with the Democrats controlling the House of Representatives as they do now, or will a sweep by one party or the other dramatically change how policy is made and passed in the U.S.?
Here is the truth of the matter: Trying to predict who will win or what they will do once they're in power is futile. Trying to figure out how each candidate's policies will play out and then make portfolio decisions that will be opportune to that is an impossible task without a certain degree of clairvoyance that humans just simply do not possess.
We have an investment thesis which does consider the outcome of the U.S. election, but that picture is much bigger than one country and one event, and it takes into consideration a much longer time period than just the next two months.
Over the next 12-to-18 months, the shortest time horizon we generally consider — usually our deliberations focus on the next three-to-five years, we generally think that (barring a substantial resurgence in COVID-19 cases or some other globally catastrophic event that we don't yet know about) there is a global economic recovery going on right now, which should continue, regardless of who is president.
Supportive policy will need to remain
Our confidence comes from knowing where we are in the current economic cycle. We have just come through the worst global recession we have ever seen, and we are still in the midst of it to some degree. The stimulus and monetary policy accommodation that is happening around the world right now is massive... and arguably necessary.
We're not halfway through the economic cycle where everything is "normal" and everyone is comfortable about the economy. Under such circumstances, policy changes might actually make a difference in a meaningful way.
As I mentioned earlier, the reality we find ourselves in right now, is one where we are coming out of a massive global recession. In other words, we are still licking our wounds, leaning on policy maker fiscal and monetary support. Whether you are left-leaning or right-leaning, you cannot get away from that fact. Fiscal and monetary policy will need to remain supportive, regardless of a red or blue president.
An attractive investment is an attractive investment
Economic activity, corporate profitability, employment and other measures connected to the economy should be in a better position a year from now. Low interest rates are a partial driver. This backdrop is very good for companies, equities and profitability, but is, unfortunately, not ideal for bond investors. Even though stock markets are at lofty valuations right now, equities are and will continue to be more attractive than bonds for those who need to generate growth.
Looking into 2021, we think the strength of the economy and the recovery from the lows we were facing, is durable. Companies will continue to do their thing – Amazon will continue to dominate retail, no matter who is in power. Netflix will continue on its mission to take market share away from cable providers and other media outlets and Apple will still come up with new devices we didn't know we needed.
In the short term, markets could correct. They could drop in response to trade war news if Donald Trump remains president, or they could drop over fears that Joe Biden will raise taxes if he is president. Bottom line, markets will probably drop at some point, and the media will likely tie the drop to current events, whether there is a true correlation or not. For a while companies may, at the margins, be impacted by a change in policy, but policy changes won't alter the attractiveness of their respective business models.
Equities should outperform but brace for volatility
With all of this in mind, we are currently overweight in U.S. equities in our portfolio. We are also slightly overweight in emerging market securities. Going forward, we could trim that emerging market position to overweight U.S. equities even more. We are firmly overweight equities right now on the belief that supportive policy will supersede whoever is in power.
We believe volatility will increase in the months preceding and possibly following the election, but feel it is likely that U.S. equities will continue to outperform bonds or cash over the next 12-to-18 months.
There are several possibilities which could come to pass during this election but the speculation you'll hear about those possibilities is noise. Speculation and noise are not meaningful drivers of value creation. Do any of the policy responses put forward by the candidates appear so fundamentally different that one will derail the economy while the other will not? Not a chance. Does the U.S. become less competitive in the interim compared to Germany, France, or Japan? I don't think so.
We are already seeing volatility measures start to spike. There will be a lot of noise related to the election but the dust should settle in the new year, making most of that noise irrelevant. Companies will continue to pursue profits. Citizens will still have basic needs that need to be met, and even if there is policy change, companies will adapt. Never underestimate industry's ability to adapt and make money.
For more information, please 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.