Regardless of your political affiliation, emotions are running high heading into this election. One of our most often asked questions is, “what should we be doing?” With that question in mind, we have seen periods where election outcomes have indeed caused short-term volatility. Generally, this volatility quickly corrects itself. Because of this, we believe it is not wise to try and “trade” the election. As you know, we closely track government policy, actions, and proposed legislation. Government influence can have very important market implications, from both macro and sector-specific perspectives. In addition, the Federal Reserve has considerable influence on both the stock and the fixed income markets. We always remind our clients and friends to NOT overreact to near-term swings in the market created by Washington activity or an upcoming election.
Short Term… Expect Uncertainty
We expect volatility around the election to continue the historical trend of a cautious market approach leading up to election day. The nature of our election process this year, from start to finish, will be unlike any election in recent memory. Razor-thin margin swings could produce widely divergent outcomes, while vote counting delays could stretch Election Night into Election Weeks/Months. As previously stated, this volatility historically corrects itself as the result settles. We also frequently remind our clients and friends that the ultimate outcome is never as good as you hope, or as bad as you fear.
Long Term… Continued Upward Bias
We continue to have a positive and upward bias toward equities. Bull markets rarely die as a result of an election. Positive factors influencing the market (and economic recovery) include unprecedented fiscal stimulus, record low interest rates, and low inflation. These positive factors outweigh the potential negatives of election uncertainty, income tax changes, virus spread, and geopolitical tensions. For this reason, we are not making dramatic changes to portfolio allocations at this time. We recommend maintaining portfolio diversification with a bias toward income producing stocks and use any potential weakness as a buying opportunity.
Biden’s Tax Policy
Many investors are concerned about the election leading to dramatically higher tax rates for both earned income and capital gains. Presidential candidate Joe Biden has stated his intent to raise the corporate tax rate to 28% from 21% currently (President Trump had lowered this rate from 35% to 21%). For this to occur, a decisive Democratic sweep in Congress would likely need to happen. And even so, the potential for higher income taxes would possibly not come before 2022, especially if the US economy is still recovering from the effects of COVID-19.
Impact of 3rd Party Candidates
In 2016, the margin of third party votes outpaced the difference between Donald Trump and Hillary Clinton in key swing states. In fact, almost 30% of the Electoral College vote went to a candidate who did not reach a majority in a state. Arizona, Florida, Michigan, North Carolina, Pennsylvania, and Wisconsin could all be considered ‘toss-up’ states. One underappreciated trait all six of these states have in common is that they were all won by President Trump in 2016, but all with less than 50% of the vote. Will the lack of a viable third party candidate in these states create a ceiling for Donald Trump as he seeks reelection?
Voting Delays and Impact on Outcomes
Five states are conducting elections entirely by mail-in ballot and 28 states and DC are offering no-excuse absentee voting. Polls suggest a substantially larger portion of Democratic voters intend to vote by mail in the 2020 election relative to Republican voters. One recent poll found that 80% of Republican voters planned to vote in person, with Democrats about evenly split between voting in person at 50% and voting by mail at 50%. There is also anticipation that turnout could be significantly higher this year, potentially overwhelming some precincts. Vote counting rules vary by jurisdiction, but for those who count and report day-of vote totals before mail-in votes, we could see significant swings between initial vote totals and the final vote. This could lead to confusion and increase the chance that some voters (and candidates) may not accept the final outcomes as valid, potentially triggering legal challenges or delays.
Contingent Election
An Electoral College tie (a realistic, although low-likelihood scenario) or the inability of the Electoral College to determine a winner triggers constitutional procedures and elevates the importance of the House election results. In a contingent election, the newly-elected House votes to select the president and the newly-elected Senate (see figure below) votes to select the vice president. The twist is each state delegation in the House casts a single vote, with a 26 vote majority (out of 50 state delegations) required to elect the president. Republicans are the majority in 26 state delegations currently, but Democrats flipping just seven key Republican seats in the House could win them back the majority (among state delegations). If the House cannot select a president, the Senate-selected vice president will serve as acting president until a president is chosen. If neither chamber is able to select their choice, the presidency is transferred by the constitutional order of succession.
Conclusion
Elections do indeed have consequences. We will continue to invest with a bias towards income-producing assets while positioning client portfolios with the minimum risk necessary to meet your personal goals and objectives. As always, please call with any questions related to your investment portfolio.
And finally, please vote!
About the Author
Matt Price serves as a Partner and Senior Vice President for The Price Group of Steward Partners. He resides in Houston with his wife, Emily, their three children and the family golden retriever. Matt studied at the University of Pennsylvania – Wharton School of Business for his Certified Investment Management Analyst (CIMA®) designation after receiving his undergraduate degree from the University of Tennessee - Knoxville. Over the past 10 years, Matt has helped families make high quality, common sense decisions regarding their wealth and their legacy. Matt firmly believes that everyone needs a wealth coach!
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