Insights

Posted on November 9, 2020

November Newsletter – How the 2020 Election Could Impact the Markets and Your Financial Plan

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How the 2020 Election Could Impact the Markets and Your Financial Plan

Every election season, political emotions run high. Candidates tell us that this is the most important election in our lifetimes. Advertisements vilifying the opposing candidate seem to never end. Political chatter on social media picks up. Through it all, it can be hard to keep our emotions under control.

The most important message is that stocks have gone up in the long run regardless of which party was in the White House or controlled Congress. Even beyond that, there just isn’t enough data to support strong conclusions that political affiliation had a direct impact over the long-term.

You should also remember that the issues you care most about may not affect your portfolios very much. Immigration, the Supreme Court and gun control are very important issues in the current presidential campaign. However, none are expected to have a large or direct effect on the performance of portfolios.

2020 Analysis

For issues that do impact investments more directly, circumstances are likely to constrain what the candidates can accomplish.

  • The launch and distribution of an effective vaccine and other progress against COVID-19 is likely the most direct path to improved economic growth. Neither candidate can make anyone go to a restaurant, attend a conference or board an airplane when the virus is not contained.
  • The weak economy will limit the opportunity for a Biden administration to raise taxes. Corporate taxes may increase but are unlikely to be restored to previous levels. In an economy struggling for growth and needing to find jobs for the unemployed, generating jobs will take precedence over additional revenue. Tax increases will likely be modest and limited.
  • The gap between the two parties may not be as wide as normal. Trade policy with China will remain a contentious issue. President Trump has been largely successful in adjusting how Americans see China. Of Republicans, 72% view China negatively, and 62% of Democrats hold the same view.
  • The lack of a follow-up to the CARES Act has increased the focus on the next aid package. Both parties favor getting aid out to Americans. The difference has been on the dollar amount and level of benefits to particular groups.
  • A Republican-controlled Senate has the potential to reduce the degree of any tax increases that are proposed. Meanwhile, current differences between the Senate, administration and House created a political impasse that has delayed the passing of additional economic stimulus.

Key Takeaways

  • Your financial plan isn’t based on the idea that a Republican or Democrat will always be in the White House.
  • Keep politics out of your portfolio. Just because an issue is important to you doesn’t mean it is to your portfolio.
  • Remember — the election will soon be over!

 

 

Have 3rd Quarter Earnings Been Better Than Expected?

After a sharp decline in economic activity during the first half of the year, the U.S. economy bounced back strongly in the third quarter. Against this backdrop, profit growth has come back nicely as well, with 3rd Quarter S&P 500 earnings per share expected to have grown 25.1% from the prior quarter. While this still leaves earnings down -14.9% year-over-year, results have generally been better than expected. With 26.4% of companies reporting, our current estimate for 3rd Quarter S&P 500 operating earnings per share is 33.87 USD; so far, 83% of companies have beaten earnings estimates and 77% of companies have beaten revenue estimates, both of which are well above long-run averages.

Analysts set the bar too low coming into the 3rd Quarter earnings season, as evidenced by the fact that those sectors most impacted by the pandemic – consumer discretionary, energy, industrials, materials and financials – are seeing earnings surprise significantly to the upside, despite being lower on a year-over-year basis. At the same time, earnings growth has been positive across the technology, health care, consumer staples and utility sectors, yet still has come in better than expected.

Additionally, we are seeing companies begin to provide guidance after suspending it in early 2020. This suggests that managements are feeling more confident in the outlook, but it is important for investors to recognize that the return of guidance has coincided with better-than-expected earnings. As a result, we believe that 2021 earnings may not bounce back as strongly as many believe; if this is indeed the case, consensus estimates for earnings growth of 41% will need to come down in the coming months.

From a portfolio standpoint, we continue to advocate for an approach characterized by balance between growth and value. We like growth from a structural standpoint, but would encourage investors to increase their active share in order to avoid valuation and positioning risk. At the same time, value looks cheap on a relative basis, and should outperform as economic activity accelerates and inflation expectations rise. The challenge, of course, is knowing exactly when this environment will materialize.

Source: JP Morgan Market Insights – October 28, 2020 “Have 3Q20 Earnings Been Better Than Expected” by David Lebovitz

Did You Know:

DEBT LIMIT

– Legislation signed by President Donald Trump in July 2019 suspended our country’s debt ceiling limit until 7/31/21, i.e., there is no statutory limit on our nation’s borrowing for the next 10 months. The debt ceiling has been raised, temporarily extended or suspended 87 times since 1960 (source: Treasury Department).

IT’S ABOUT TIME

– Americans have reduced their outstanding balances on their revolving debt, e.g., credit card debt and home equity loans, for 6 months in a row, i.e., March 2020 through and including August 2020 (source: Federal Reserve).

 

Quotes:

“Peace can become a lens through which you see the world. Be it. Live it. Radiate it out. Peace is an inside job.” —Wayne Dyer

“Many are the plans in the mind of a man, but it is the purpose of the Lord that will stand.” – Proverbs 19:21