A Post-Election Update: What Else Should We be Considering?

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Adrian Cronje
November 10, 2020
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Over the weekend, several news agencies called the U.S. presidential election for former Vice President Joe Biden, citing a lead in the popular vote and a majority of the electoral college. According to the latest reports, Biden narrowly edged the incumbent, President Donald Trump, in several battleground states. The Trump Administration has yet to concede defeat, several states may have a recount, and legal proceedings and court hearings may take place to determine the veracity of the findings. Certified results will be announced upon conclusion of a joint session of the Senate and the House of Representatives during which electoral votes are counted. While not yet official, Biden supporters spent the weekend celebrating, and the country is increasingly anticipating the prospect of change in the Oval Office.

As we discussed in our initial reaction to the election results last Thursday, the most likely outcome of last week’s election will be gridlock in Washington, with Democrats holding the Executive Branch and the House of Representatives, and Republicans retaining control of the Senate. However, a new development occurred over the weekend. Amid record voter turnout, the state of Georgia remained too close to call, with both Republican Senators now facing runoffs from their Democratic challengers in January 2021. If the Democrats were to capture both seats, it would give them 50 votes, enough to push through Joe Biden’s legislative agenda over the next two years.

Should this come to pass, the capital markets would discount a much greater chance of higher corporate and personal taxes and regulation in the first two years of a Biden presidency. No Republican has ever lost a runoff in Georgia, a reliably red state over the past three decades. For the next two months, Georgia will become the center of the political universe.

Two months is a very long time in politics, and much can—and will—happen before we have certainty over who controls the Senate in 2021 and 2022. For this reason, we want to resist jumping to conclusions prematurely as the election continues to play out. Yet, several assumptions can already be drawn:

  1. As Partner and Head of Financial Planning John Maddison laid out a few weeks’ ago, there are important financial planning considerations should the Democratic party capture control of the Senate in January. We are currently enjoying a unique confluence of events, such as depressed asset valuations and low interest rates, which make several estate planning techniques potent over the next few years before current estate laws sunset in 2025.
  2. The bond and stock markets will now turn their attention back to the fact that we are still amid a serious pandemic, despite promising news from Pfizer regarding vaccine trials Monday morning. While the election has grabbed most of the headlines of late, new cases of COVID-19 are reported to be surging again in the U.S. to record daily highs. President Elect Joe Biden committed over the weekend to convening a reconstituted coronavirus task force with a new plan to contain the virus. It is unclear how this task force will co-operate with President Trump’s existing team. In the meantime, capital markets are considering the need for further targeted lockdowns as the winter unfolds. So far, corporate earnings have continued to exceed expectations despite the severe recession the U.S. has endured in 2020. As our Director of Research, Gabe Lembeck, mentioned last week, until there is widespread vaccination and the economy can be opened up again, growth stocks with strong balance sheets and high and predictable profitability are likely to outperform cheaper value sectors.
  3. Though the U.S. economy has recouped in the third quarter two-thirds of the ground it lost during the first half of the year, and the unemployment rate fell to under 7% by November, there are significant sectors which remain idle and stranded, especially in areas dependent on social gathering such as leisure, hospitality, and travel. The need for additional timely and targeted stimulus to bring relief to these sectors is paramount. It is unclear whether such aid will be agreed upon during the next few months.
  4. The urgent need for greater fiscal policy stimulus was reiterated by the Federal Reserve last week, which repeated its stance of keeping interest rates low for an extended period of time while seeking to reassure markets it was not out of ammunition to aid the economic recovery further.
  5. This dovish stance on future interest rates from the Fed, along with an expected thawing in the next administration’s stance towards China, has led to a selloff in the U.S. dollar. Emerging Market stocks, to which we increased our allocation last week, are receiving a tailwind as a result.
  6. Within the next few weeks, we expect to see whether Biden will deliver the compromising, centrist agenda markets anticipate with the announcement of his cabinet selections.
  7. Our model discipline is still signaling stock market earnings and dividend yields are not extremely expensive relative to current and future interest rates. Any cash over and above two years’ worth of spending needs net of portfolio yield should be averaged into markets over a period of six months.
  8. The need for greater expenditure on infrastructure and climate change appears to be two areas on which there is common ground for a gridlocked government to make progress. Our allocation to a global infrastructure manager within Private Markets stands to benefit.
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