The voters have spoken. What they have said is still up for grabs. As of the writing of this missive, we only know two things for sure: 1.) we’re happy not to see the unending barrage of commercials on TV and social media, and 2.) pollsters are worthless.
It seems as though America will have a divided government as a result of this election. Even though Republicans took back some seats in the House of Representatives, that body will still be Democratically controlled. It looks as though, today, that the Senate will remain thinly in Republican control. Regardless of whom the President-Elect will be, gridlock seems a cinch.
The purpose of this letter is not to discuss the winners and losers per se. It’s merely to try to predict what monetary policy will be in the near term and how the stock market will react for our portfolios. Last week, equities had a tumultuous decline of over 5%. The volatility index (VIX) hit the panic level of 40. This perhaps can be attributed to investors’ uncertainty about the election. It is likely that many folks sold securities in which they had gains to avoid the possible adverse tax consequences of a pollster-projected blue wave. Wall Street’s reaction this morning post-election has been positive even with the lack of certainty regarding the presidency. Where do we go from here?
It’s difficult to say with any clarity what will happen over the next couple of weeks. If Biden is declared the winner, there will probably be calls for recounts in several states as well as lawsuits challenging the validity of the ballot counting process. This potential period of uncertainty could be a short-term headwind for stocks. If Trump were to win a second term, it’s pretty much business as usual. In either case, gridlock still seems to be a roadmap moving forward.
This doesn’t mean that we will be looking at portfolios to remain totally status quo. There are sectors in the market that will do better in a Biden administration than one headed by Trump. The opposite case is also true. Therefore, we will be looking at potential small changes in allocation once the winners are fully recognized. Rc and I will be examining all portfolios and discuss these decisions before we approach you with our suggestions. We also will be looking at year-end tax culling for taxable portfolios.
One major item that appears stable today is the current tax code. It will be very difficult for possible President-Elect Biden to pass any sort of individual and/or corporate tax agenda as long as the Senate remains in Republican control. Rates should stay the same until the results of the next election cycle are known. The fears that many of us had regarding a blue wave appear to be unfounded at this juncture. Thus, whatever plans we may have had for aggressive tax strategizing now look to be moot points. With no major tax reform in sight, it allows us to have an investment runway of at least a couple of years.
My feeling at this point is that if Biden wins, he might actually be better at working across the aisle to get bipartisan legislation passed than Trump. His experience as a Senator during several administrations might allow him to work better with Majority Leader McConnell than even a Republican president. It is also plausible that he will have a far better relationship with House Speaker Pelosi than Trump (If he merely speaks to her that would be an improvement.). He also could be seen as someone who would try to slowly heal division within our country. If Trump were indeed to be reelected, it’s my opinion that divisions would be exacerbated. In either case, we will nonetheless have a divided government.
We’re going to obviously know a lot more by the end of this month. It seems logical that the Federal Reserve will remain in its stance of being an open checkbook for America’s economy. It is hopeful that new stimulus will be passed for those American individuals and businesses in greatest need. Both of these assertions would be positives for the market.
The proverbial 800-lb. elephant in the room, though, is still the Coronavirus. Without doubt, a Biden presidency would address the pandemic in a radically different manner than Trump. Would there be a mask mandate? Would increased positive cases, hospitalizations, and deaths that are being predicted by scientists necessitate partial and/or complete shutdowns again? How would a slowly recovering economy be affected by these potential shutdowns?
There’s obviously a lot to digest here. We will be monitoring things very closely in the days to come. Again, we will be examining all of your portfolios with an eye to the future. We will be contacting you in the next few weeks with our thoughts. In the meantime, if you have any questions or comments, please give us a call or send an e-mail. Our team is ready to help with any issue or request that you have. Most importantly, stay safe and stay sane. Thanks as always for your trust and support.
The opinions expressed in this letter are those of William Schiffman and should not be construed as specific investment advice. All information is believed to be from reliable sources; however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Diversification cannot assure a profit or guarantee against a loss. The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. Indices are unmanaged and do not incur fees. One cannot directly invest in an index.
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