Nov 04, 2020

Our Election Take

Going into the election, many market watchers worried about a contested result. The market hates uncertainty and it would have been reasonable to expect a potential selloff in stocks the morning after a “to be determined” presidential result. Yet we woke up to a sizable rally. How is this possible?

We wrote an article a couple months ago on the U.S. election, “Red or Blue, Does it Matter?” We argued that the presidential election could cause short-term volatility, but the outcome was unlikely to have an impact on longer term stock market performance. History supports this, as the markets show positive returns one year post the election in nine out of the last ten contests. We are now past election day and thought we would revisit our thoughts.

 

First, let’s review what we know:

  • The Presidential election is a toss up. Votes are still being counted and we may not have an unofficial winner until the end of the week.
  • An official winner may not be known for some time as some states endure recounts, both parties lawyer up, and disputes wind their way through courts. The official result during the 2000 election was not known until mid-December.
  • The Senate likely remains Republican-controlled, while the House remains in the Democrats hands.

 

Going into the election, many market watchers worried about a contested result. The market hates uncertainty and it would have been reasonable to expect a potential selloff in stocks the morning after a “to be determined” presidential result. Yet we woke up to a sizable rally. How is this possible?

 

Regardless of who wins the Presidency, the results of election night did indeed remove a lot of uncertainty as Washington will remain gridlocked with no party controlling all three of the Senate, House and Presidency. This means either status quo with a Trump victory or a smaller degree of change under a Biden victory. For instance, a President Biden will likely be unable to dramatically increase corporate taxes, push through a multi-trillion dollar stimulus package or institute $2T in subsidies for green energy. The Republican-controlled senate will not allow it.

 

Today’s market action is the unwinding of what some have called the “Biden trade”, which had seen tailwinds for sectors like renewable energy and more cyclical stocks (stimulus relief will now be smaller) and headwinds for technology names (potentially increased scrutiny and taxes) and traditional energy.

 

This is also a good reminder of why it is important to not make long-term decisions based on short-term events. The unexpected can happen. Instead of a blue wave, we likely will have more of the same. We believe this is good for the stock market. Investors that sold out going into the election may now be in regret. This does not mean there won't be increased volatility ahead - almost certainly there will be, but it is important to remain focussed on the destination and not each bump in the road. For our clients, that means investing in diversified portfolios of high quality companies that are resilient regardless of who is in the White House and staying focussed on our long-term investment process.